We like these underlying capital return trends at Allied Digital Services (NSE: ADSL)

Did you know that there are financial metrics that can provide clues of a potential multi-bagger? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. With this in mind, we have noticed some promising trends in Allied Digital Services (NSE: ADSL) so let’s look a little deeper.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Allied Digital Services, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.11 = ₹651m ÷ (₹7.4b – ₹1.2b) (Based on the last twelve months to September 2022).

Thereby, Allied Digital Services posted a ROCE of 11%. On its own, that’s pretty standard performance, but compared to the computer industry average of 13%, it’s not nearly as good.

Our analysis indicates that ADSL is potentially undervalued!

NSEI: Return on ADSL Capital Employed November 10, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you’d like to investigate Allied Digital Services’ past further, check out this free chart of past profits, revenue and cash flow.

So, what is the ROCE trend for Allied Digital Services?

We like the trends we see at Allied Digital Services. The data shows that capital returns have increased significantly over the past five years to 11%. The company is actually making more money per dollar of capital used, and it’s worth noting that the amount of capital has also increased by 27%. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.

Along the same lines, the company’s ratio of current liabilities to total assets has decreased to 16%, essentially reducing its funding from short-term creditors or vendors. This tells us that Allied Digital Services has increased its returns without depending on the increase in its current liabilities, which we are very pleased with.

The Key Takeaway

Overall, it’s great to see Allied Digital Services reaping the rewards of past investments and growing its capital base. Given that the stock has returned 450% to shareholders over the past five years, it seems investors recognize these changes. Therefore, we think it would be worth checking whether these trends will continue.

If you would like to further research Allied Digital Services, you may be interested in knowing the 4 warning signs that our analysis found.

Although Allied Digital Services doesn’t get the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.

Valuation is complex, but we help make it simple.

Find out if Allied Digital Services is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Margie D. Carlisle