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

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Aro Granite Industries (NSE:AROGRANITE), we weren't too upbeat about how things were going.

What Is 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)

0.047 = ₹113m ÷ (₹4.3b - ₹1.9b) (Based on the trailing twelve months to September 2024).

So, Aro Granite Industries has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Building industry average of 16%.

View 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'd like to look at how Aro Granite Industries has performed in the past in other metrics, you can view this free graph of Aro Granite Industries' 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 doesn't inspire confidence. About five years ago, returns on capital were 7.3%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Aro Granite Industries to turn into a multi-bagger.

On a side note, Aro Granite Industries' current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's unfortunate that Aro Granite Industries is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 3.2% 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.

Aro Granite Industries does have some risks though, and we've spotted 3 warning signs for Aro Granite Industries that you might be interested in.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.