Returns On Capital At Igarashi Motors India (NSE:IGARASHI) Paint A Concerning Picture

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Igarashi Motors India (NSE:IGARASHI), the trends above didn't look too great.

What Is 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 Igarashi Motors India:

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

0.049 = ₹250m ÷ (₹7.7b - ₹2.7b) (Based on the trailing twelve months to March 2024).

Thus, Igarashi Motors India has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 15%.

See our latest analysis for Igarashi Motors India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Igarashi Motors India's ROCE against it's prior returns. If you'd like to look at how Igarashi Motors India has performed in the past in other metrics, you can view this free graph of Igarashi Motors India's past earnings, revenue and cash flow.

What Can We Tell From Igarashi Motors India's ROCE Trend?

We are a bit worried about the trend of returns on capital at Igarashi Motors India. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Igarashi Motors India to turn into a multi-bagger.

The Bottom Line On Igarashi Motors India's ROCE

In summary, it's unfortunate that Igarashi Motors India is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 138%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Igarashi Motors India does come with some risks, and we've found 1 warning sign that you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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