The Trends At Fiem Industries (NSE:FIEMIND) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Fiem Industries (NSE:FIEMIND) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Fiem Industries:

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

0.094 = ₹588m ÷ (₹9.6b - ₹3.4b) (Based on the trailing twelve months to September 2020).

So, Fiem Industries has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

See our latest analysis for Fiem Industries

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

So How Is Fiem Industries' ROCE Trending?

When we looked at the ROCE trend at Fiem Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.4% from 23% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Fiem Industries' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Fiem Industries and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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