What Do The Returns On Capital At Shankara Building Products (NSE:SHANKARA) Tell Us?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shankara Building Products (NSE:SHANKARA), it didn't seem to tick all of these boxes.

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

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 Shankara Building Products, this is the formula:

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

0.10 = ₹550m ÷ (₹12b - ₹6.2b) (Based on the trailing twelve months to June 2020).

Thus, Shankara Building Products has an ROCE of 10.0%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

View our latest analysis for Shankara Building 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 Shankara Building Products, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Shankara Building Products, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10.0% from 33% five years ago. However it looks like Shankara Building Products might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shankara Building Products' current liabilities are still rather high at 53% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, Shankara Building Products is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 77% over the last three years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Shankara Building Products does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

While Shankara Building 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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