Return on investment at Ador Welding (NSE: ADORWELD) paint a worrying picture
If we want to avoid declining business, what trends can warn us in advance? Companies in decline often have two underlying trends, first one is declining return on the capital employed (ROCE) and a declining base of the capital employed. This suggests that the company is making less profit on its investments and its total assets are falling. And it doesn’t look so good the first time you read it Ador welding (NSE: ADORWELD), so let’s see why.
Return on Capital Employed (ROCE): What is it?
Just to clarify, if you are not sure: ROCE is a key figure for evaluating how much pre-tax profit (in percent) a company earns with the capital invested in its business. To calculate this metric for Ador Welding, this is the formula:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.037 = ₹ 89m ÷ (₹ 3.8b – ₹ 1.3b) (Based on the last twelve months through March 2021).
So, Ador Welding has a ROCE of 3.7%. Ultimately, this is a low return and is below the machine industry average of 12%.
Check out our latest analysis for Ador Welding
Although the past is not representative of the future, it can be helpful to know how a company has performed in the past. That is why we have this graphic above. If you are interested in digging further into Ador Welding’s past, this is the place to be free Graph of past earnings, sales and cash flows.
The ROCE trend
Caution should be exercised with Ador Welding as returns are trending downward. Unfortunately, returns on investments have plummeted from the 14% they earned five years ago. In the meantime, the capital employed in the company has remained roughly the same in the reporting period. This combination can be indicative of a mature company that still has areas where capital needs to be invested but the returns that are generated are not as high due to possible new competition or lower margins. Since these trends are usually not conducive to the development of a multi-excavator, we wouldn’t be holding our breath if Ador Welding became one if things continued as they did before.
The key to take away
All in all, the lower returns with the same capital employed are not exactly signs of a compounding machine. Despite these poor fundamentals, the stock has gained a whopping 156% over the past five years, making investors look very optimistic. In any case, the current underlying trends do not bode well for long-term performance. If they don’t turn around, we’d look elsewhere.
However, Ador Welding carries some risks as we have found 3 warning signs in our investment analysis, and 1 of them shouldn’t be ignored …
For those who like to invest solid companies, look at that free List of companies with solid balance sheets and high returns on equity.
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