Some Investors May Be Worried About Aro Granite Industries' (NSE:AROGRANITE) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Aro Granite Industries (NSE:AROGRANITE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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)

0.0052 = ₹14m ÷ (₹4.3b - ₹1.7b) (Based on the trailing twelve months to September 2023).

So, Aro Granite Industries has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Building industry average of 17%.

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'd like to look at how Aro Granite Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Aro Granite Industries' ROCE Trending?

In terms of Aro Granite Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 5.7% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Aro Granite Industries has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

We're a bit apprehensive about Aro Granite Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 7.1% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Aro Granite Industries (2 are concerning) 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.