What Do The Returns On Capital At Umang Dairies (NSE:UMANGDAIRY) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Umang Dairies (NSE:UMANGDAIRY) and its ROCE trend, we weren't exactly thrilled.

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 Umang Dairies, this is the formula:

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

0.12 = ₹110m ÷ (₹1.3b - ₹405m) (Based on the trailing twelve months to September 2020).

Therefore, Umang Dairies has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.

View our latest analysis for Umang Dairies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Umang Dairies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Umang Dairies, check out these free graphs here.

What Does the ROCE Trend For Umang Dairies Tell Us?

When we looked at the ROCE trend at Umang Dairies, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Umang Dairies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Umang Dairies is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 35% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for Umang Dairies (1 is concerning) you should be aware of.

While Umang Dairies 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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