Here's What To Make Of Poddar Pigments' (NSE:PODDARMENT) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Poddar Pigments (NSE:PODDARMENT) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Poddar Pigments is:

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

0.13 = ₹247m ÷ (₹2.2b - ₹287m) (Based on the trailing twelve months to March 2020).

Thus, Poddar Pigments has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

See our latest analysis for Poddar Pigments

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Poddar Pigments, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Poddar Pigments, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Poddar Pigments might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Poddar Pigments' ROCE

Bringing it all together, while we're somewhat encouraged by Poddar Pigments' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 17% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Poddar Pigments you'll probably want to 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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