Returns On Capital At Poddar Pigments (NSE:PODDARMENT) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Poddar Pigments (NSE:PODDARMENT) and its ROCE trend, we weren't exactly thrilled.

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 Poddar Pigments:

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

0.10 = ₹194m ÷ (₹2.2b - ₹287m) (Based on the trailing twelve months to June 2020).

Therefore, Poddar Pigments has an ROCE of 10%. In isolation, that's a pretty standard return but against the Chemicals industry average of 14%, it's not as good.

View our latest analysis for Poddar Pigments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Poddar Pigments' ROCE against it's prior returns. If you'd like to look at how Poddar Pigments has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Poddar Pigments' ROCE Trending?

In terms of Poddar Pigments' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Poddar Pigments' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Poddar Pigments have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Poddar Pigments and understanding them should be part of your investment process.

While Poddar Pigments 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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