The Returns At Garware Technical Fibres (NSE:GARFIBRES) Provide Us With Signs Of What's To Come

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Garware Technical Fibres (NSE:GARFIBRES) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Garware Technical Fibres, this is the formula:

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

0.15 = ₹1.2b ÷ (₹12b - ₹4.1b) (Based on the trailing twelve months to June 2020).

Therefore, Garware Technical Fibres has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Luxury industry.

See our latest analysis for Garware Technical Fibres

In the above chart we have measured Garware Technical Fibres' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Garware Technical Fibres.

So How Is Garware Technical Fibres' ROCE Trending?

In terms of Garware Technical Fibres' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. 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 related note, Garware Technical Fibres has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Garware Technical Fibres because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 480% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for Garware Technical Fibres you'll probably want to know about.

While Garware Technical Fibres 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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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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