We're Watching These Trends At Kiri Industries (NSE:KIRIINDUS)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kiri Industries (NSE:KIRIINDUS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Kiri Industries, this is the formula:

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

0.037 = ₹753m ÷ (₹24b - ₹3.5b) (Based on the trailing twelve months to June 2020).

Therefore, Kiri Industries has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

See our latest analysis for Kiri Industries

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're interested in investigating Kiri Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kiri Industries' ROCE Trend?

On the surface, the trend of ROCE at Kiri Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.7% from 5.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Kiri Industries' ROCE

We're a bit apprehensive about Kiri Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 359% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

Kiri Industries could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Kiri Industries 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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