The Trends At Plastiblends India (NSE:PLASTIBLEN) That You Should Know About

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Plastiblends India (NSE:PLASTIBLEN) 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. The formula for this calculation on Plastiblends India is:

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

0.13 = ₹421m ÷ (₹4.1b - ₹867m) (Based on the trailing twelve months to June 2020).

So, Plastiblends India has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

Check out our latest analysis for Plastiblends India

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 Plastiblends India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Plastiblends India doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 28% five years ago. 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.

What We Can Learn From Plastiblends India's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Plastiblends India have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 7.7% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 3 warning signs with Plastiblends India and understanding them should be part of your investment process.

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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