Returns On Capital At Apollo Pipes (NSE:APOLLOPIPE) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Apollo Pipes (NSE:APOLLOPIPE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Apollo Pipes, this is the formula:

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

0.10 = ₹458m ÷ (₹6.0b - ₹1.5b) (Based on the trailing twelve months to September 2022).

Thus, Apollo Pipes has an ROCE of 10%. In isolation, that's a pretty standard return but against the Building industry average of 13%, it's not as good.

Check out our latest analysis for Apollo Pipes

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

So How Is Apollo Pipes' ROCE Trending?

When we looked at the ROCE trend at Apollo Pipes, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Apollo Pipes' ROCE

While returns have fallen for Apollo Pipes in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 316% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Apollo Pipes, we've discovered 1 warning sign that you should be aware of.

While Apollo Pipes may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.