Stock Analysis

The Returns At S.P. Apparels (NSE:SPAL) Provide Us With Signs Of What's To Come

NSEI:SPAL
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 S.P. Apparels (NSE:SPAL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 S.P. Apparels, this is the formula:

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

0.087 = ₹532m ÷ (₹8.9b - ₹2.8b) (Based on the trailing twelve months to March 2020).

So, S.P. Apparels has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Luxury industry average of 10%.

View our latest analysis for S.P. Apparels

roce
NSEI:SPAL Return on Capital Employed July 23rd 2020

In the above chart we have a measured S.P. Apparels' 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.

So How Is S.P. Apparels' ROCE Trending?

On the surface, the trend of ROCE at S.P. Apparels doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 8.7%. However it looks like S.P. Apparels might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 related note, S.P. Apparels has decreased its current liabilities to 31% 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.

Our Take On S.P. Apparels' ROCE

In summary, S.P. Apparels is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 84% in the last three years. 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.

If you'd like to know more about S.P. Apparels, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While S.P. Apparels 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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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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