Investors Met With Slowing Returns on Capital At Aro Granite Industries (NSE:AROGRANITE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Aro Granite Industries (NSE:AROGRANITE) 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)

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. 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)

0.073 = ₹178m ÷ (₹4.0b - ₹1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Aro Granite Industries has an ROCE of 7.3%. 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

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 Aro Granite Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Aro Granite Industries' ROCE Trending?

There are better returns on capital out there than what we're seeing at Aro Granite Industries. Over the past five years, ROCE has remained relatively flat at around 7.3% and the business has deployed 34% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Aro Granite Industries' ROCE

In conclusion, Aro Granite Industries has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Aro Granite Industries does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those can't be ignored...

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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