What Do The Returns On Capital At Superhouse (NSE:SUPERHOUSE) Tell Us?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Superhouse (NSE:SUPERHOUSE), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Superhouse:

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

0.075 = ₹291m ÷ (₹6.8b - ₹3.0b) (Based on the trailing twelve months to June 2020).

So, Superhouse has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Luxury industry average of 8.6%.

Check out our latest analysis for Superhouse

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Superhouse doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.5% from 23% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Another thing to note, Superhouse has a high ratio of current liabilities to total assets of 43%. 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Superhouse have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 46% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 4 warning signs facing Superhouse that you might find interesting.

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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