The Trends At Aro Granite Industries (NSE:AROGRANITE) That You Should Know About

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

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

So, 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 11%.

Check out 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.

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. 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. 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

In summary, Aro Granite Industries has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 13% 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 2 of those are a bit concerning...

While Aro Granite Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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