Will Indo Count Industries (NSE:ICIL) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Indo Count Industries (NSE:ICIL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Indo Count Industries is:

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

0.13 = ₹1.7b ÷ (₹17b - ₹4.9b) (Based on the trailing twelve months to September 2020).

Thus, Indo Count Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Luxury industry.

Check out our latest analysis for Indo Count 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 Indo Count Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Indo Count Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 48%, but since then they've fallen to 13%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Indo Count Industries has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Indo Count Industries' ROCE

In summary, Indo Count Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

One more thing: We've identified 2 warning signs with Indo Count Industries (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Indo Count 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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