The Returns At Kewal Kiran Clothing (NSE:KKCL) Provide Us With Signs Of What's To Come

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Kewal Kiran Clothing (NSE:KKCL) 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 Kewal Kiran Clothing:

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

0.19 = ₹869m ÷ (₹6.4b - ₹1.8b) (Based on the trailing twelve months to March 2020).

Therefore, Kewal Kiran Clothing has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 11% it's much better.

View our latest analysis for Kewal Kiran Clothing

In the above chart we have a measured Kewal Kiran Clothing's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Kewal Kiran Clothing's ROCE Trend?

In terms of Kewal Kiran Clothing's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 28% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Kewal Kiran Clothing's ROCE

Bringing it all together, while we're somewhat encouraged by Kewal Kiran Clothing's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Kewal Kiran Clothing does have some risks though, and we've spotted 1 warning sign for Kewal Kiran Clothing that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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