Aro Granite Industries (NSE:AROGRANITE) Will Be Hoping To Turn Its Returns On Capital Around

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Aro Granite Industries (NSE:AROGRANITE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Aro Granite Industries, this is the formula:

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

0.063 = ₹173m ÷ (₹4.5b - ₹1.8b) (Based on the trailing twelve months to March 2022).

Therefore, Aro Granite Industries has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Building industry average of 12%.

See our latest analysis for Aro Granite Industries

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

How Are Returns Trending?

When we looked at the ROCE trend at Aro Granite Industries, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 6.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Aro Granite Industries' ROCE

While returns have fallen for Aro Granite Industries in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 48% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Aro Granite Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.