Should You Be Impressed By Aro Granite Industries' (NSE:AROGRANITE) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

What is 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. The formula for this calculation on Aro Granite Industries is:

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

0.073 = ₹180m ÷ (₹4.0b - ₹1.5b) (Based on the trailing twelve months to September 2020).

Thus, 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 9.9%.

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 want to delve into the historical earnings, revenue and cash flow of Aro Granite Industries, check out these free graphs here.

The Trend Of ROCE

The returns on capital haven't changed much for Aro Granite Industries in recent years. The company has consistently earned 7.3% for the last five years, and the capital employed within the business has risen 34% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Aro Granite Industries has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 25% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Aro Granite Industries has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with Aro Granite Industries (including 2 which is can't be ignored) .

While Aro Granite Industries 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. 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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