The Returns At Sirca Paints India (NSE:SIRCA) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sirca Paints India (NSE:SIRCA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Sirca Paints India:

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

0.16 = ₹294m ÷ (₹2.1b - ₹250m) (Based on the trailing twelve months to March 2020).

Therefore, Sirca Paints India has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 2.1% it's much better.

View our latest analysis for Sirca Paints India

In the above chart we have a measured Sirca Paints India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sirca Paints India here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Sirca Paints India, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 38% 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'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, Sirca Paints India has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. 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 Key Takeaway

To conclude, we've found that Sirca Paints India is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 5.4% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Sirca Paints India (including 1 which is is a bit concerning) .

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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