Can Ginni Filaments (NSE:GINNIFILA) Turn Things Around?

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Ginni Filaments (NSE:GINNIFILA), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ginni Filaments, this is the formula:

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

0.13 = ₹387m ÷ (₹5.9b - ₹3.0b) (Based on the trailing twelve months to June 2020).

So, Ginni Filaments has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Luxury industry.

Check out our latest analysis for Ginni Filaments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ginni Filaments' ROCE against it's prior returns. If you're interested in investigating Ginni Filaments' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Ginni Filaments, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 21% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ginni Filaments becoming one if things continue as they have.

On a separate but related note, it's important to know that Ginni Filaments has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's unfortunate that Ginni Filaments is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Ginni Filaments (of which 2 are significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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