These Metrics Don't Make Butterfly Gandhimathi Appliances (NSE:BUTTERFLY) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Butterfly Gandhimathi Appliances (NSE:BUTTERFLY), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Butterfly Gandhimathi Appliances is:

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

0.049 = ₹111m ÷ (₹4.9b - ₹2.6b) (Based on the trailing twelve months to June 2020).

So, Butterfly Gandhimathi Appliances has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.

Check out our latest analysis for Butterfly Gandhimathi Appliances

Historical performance is a great place to start when researching a stock so above you can see the gauge for Butterfly Gandhimathi Appliances' ROCE against it's prior returns. If you're interested in investigating Butterfly Gandhimathi Appliances' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of returns that Butterfly Gandhimathi Appliances is generating are raising some concerns. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. In addition to that, Butterfly Gandhimathi Appliances is now employing 25% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, Butterfly Gandhimathi Appliances has a high ratio of current liabilities to total assets of 54%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Butterfly Gandhimathi Appliances' ROCE

In summary, it's unfortunate that Butterfly Gandhimathi Appliances is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 23% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Butterfly Gandhimathi Appliances (1 is concerning) you should be aware of.

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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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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