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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Morarjee Textiles (NSE:MORARJEE), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Morarjee Textiles, this is the formula:

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

0.059 = ₹184m ÷ (₹6.8b - ₹3.7b) (Based on the trailing twelve months to March 2020).

Thus, Morarjee Textiles has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

See our latest analysis for Morarjee 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 Morarjee Textiles has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Morarjee Textiles, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 5.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Morarjee Textiles' current liabilities have increased over the last five years to 54% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.9%. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Morarjee Textiles' reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 80% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Morarjee Textiles has the makings of a multi-bagger.

If you want to know some of the risks facing Morarjee Textiles we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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