Returns On Capital At Monte Carlo Fashions (NSE:MONTECARLO) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Monte Carlo Fashions (NSE:MONTECARLO) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Monte Carlo Fashions:

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

0.12 = ₹784m ÷ (₹9.1b - ₹2.6b) (Based on the trailing twelve months to June 2020).

Thus, Monte Carlo Fashions has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Luxury industry.

See our latest analysis for Monte Carlo Fashions

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 Monte Carlo Fashions' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Monte Carlo Fashions Tell Us?

On the surface, the trend of ROCE at Monte Carlo Fashions doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Monte Carlo Fashions' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Monte Carlo Fashions, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Monte Carlo Fashions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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