Should We Be Excited About The Trends Of Returns At Lambodhara Textiles (NSE:LAMBODHARA)?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Lambodhara Textiles (NSE:LAMBODHARA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Lambodhara Textiles is:

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

0.098 = ₹105m ÷ (₹1.3b - ₹209m) (Based on the trailing twelve months to June 2020).

Therefore, Lambodhara Textiles has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Luxury industry average of 9.2%.

Check out our latest analysis for Lambodhara Textiles

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'd like to look at how Lambodhara Textiles has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Lambodhara Textiles doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, Lambodhara Textiles has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, we're somewhat concerned by Lambodhara Textiles' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 92% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Lambodhara Textiles does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While Lambodhara Textiles 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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