There Are Reasons to Feel Uncomfortable About Adani Ports and Special Economic Zone Capital Returns (NSE:ADANIPORTS) | Whuff News


Did you know there are some financial metrics that can give you an indication of the potential of multiple bags? Usually, we want to see an increasing trend come back on capital employed (ROCE) and in addition, expansion basic from capital used. Essentially this means that the company has profitable initiatives that it can continue to reinvest, which is the hallmark of a compounding machine. Given that, when we see Adani Port and Special Economic Zone (NSE:ADANIPORTS) and its ROCE trend, we are not very excited.

Return On Capital Employed (ROCE): What Is It?

If you’ve never worked with ROCE before, it measures the ‘return’ (profit before tax) that a company generates on capital employed in its business. Analysts use this formula to calculate it for Adani Ports and Special Economic Zones:

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

0.089 = ₹74b ÷ (₹949b – ₹111b) (Based on the trailing twelve months to June 2022).

So, Adani Ports and Special Economic Zones had a ROCE of 8.9%. In itself, that is a low figure but it is around the 7.5% average generated by the Infrastructure industry.

Check out our latest analysis for Adani Ports and Special Economic Zones

roce
NSEI:ADANIPORTS Return on Capital Employed 30 August 2022

Above you can see how the current ROCE for Adani Ports and Special Economic Zones compares to previous returns on capital, but there’s only so much you can learn from the past. If you want, you can check forecasts from analysts covering Adani Ports and Special Economic Zones here for free

So How Are Adani Ports and Special Economic Zones ROCE Trending?

Unfortunately, this trend is not so great with ROCE falling from 13% five years ago, while capital employed has grown 126%. It is said that Adani Ports and Special Economic Zones raised some capital before their latest results were released, so that could partly explain the increase in capital used. The funds raised are likely to be unused yet, so it is worth looking at what happens in the future with Adani Ports and Special Economic Zones earnings and if they change as a result of the capital increase. Also, we found that by looking at the company’s most recent EBIT, the figure is within 10% of the previous year’s EBIT so you can basically assign the decline in ROCE mainly to that capital increase.

What We Can Learn From Adani Ports and Special Economic Zone ROCE

Putting it all together, while we are quite encouraged by Adani Ports and Special Economic Zones reinvesting in its own business, we are aware that the returns are diminishing. But to long-term shareholders, the stock has given them an incredible 124% return over the past five years, so the market is looking bright about its future. But if this fundamental trend trajectory continues, we think the chances of it being a multi-bagger from here are not high.

Like most companies, Adani Ports and Special Economic Zones come with some risks, and we have found them 3 warning signs which you should be aware of.

If you want to find a solid company with great earnings, check this out free list of companies with good balance sheets and impressive returns on equity.

Valuation is complicated, but we help make it simple.

Find out if Adani Port and Special Economic Zone potential over or under value by reviewing our comprehensive analysis, which includes fair value estimation, risk and warning, dividends, insider trading and financial health.

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This article by Simply Wall St is general in nature. We provide reviews based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.



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