What Do The Returns On Capital At AVT Natural Products (NSE:AVTNPL) Tell Us?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think AVT Natural Products (NSE:AVTNPL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. To calculate this metric for AVT Natural Products, this is the formula:

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

0.17 = ₹504m ÷ (₹3.8b - ₹820m) (Based on the trailing twelve months to March 2020).

Thus, AVT Natural Products has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.

View our latest analysis for AVT Natural Products

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 want to delve into the historical earnings, revenue and cash flow of AVT Natural Products, check out these free graphs here.

What Does the ROCE Trend For AVT Natural Products Tell Us?

On the surface, the trend of ROCE at AVT Natural Products doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 22% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From AVT Natural Products' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for AVT Natural Products. These trends are starting to be recognized by investors since the stock has delivered a 3.5% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

AVT Natural Products does have some risks though, and we've spotted 3 warning signs for AVT Natural Products that you might be interested in.

While AVT Natural Products may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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