Here's What's Concerning About Bannari Amman Spinning Mills (NSE:BASML)

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Bannari Amman Spinning Mills (NSE:BASML), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Bannari Amman Spinning Mills:

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

0.035 = ₹208m ÷ (₹12b - ₹6.6b) (Based on the trailing twelve months to June 2020).

Therefore, Bannari Amman Spinning Mills has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.6%.

Check out our latest analysis for Bannari Amman Spinning Mills

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're interested in investigating Bannari Amman Spinning Mills' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Bannari Amman Spinning Mills. Unfortunately the returns on capital have diminished from the 9.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bannari Amman Spinning Mills becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Bannari Amman Spinning Mills' ROCE

In summary, it's unfortunate that Bannari Amman Spinning Mills is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was five years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

Bannari Amman Spinning Mills does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Bannari Amman Spinning Mills may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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