Balmer Lawrie (NSE:BALMLAWRIE) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Balmer Lawrie (NSE:BALMLAWRIE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Balmer Lawrie, this is the formula:

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

0.07 = ₹1.3b ÷ (₹24b - ₹6.0b) (Based on the trailing twelve months to September 2021).

Therefore, Balmer Lawrie has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 9.4%.

Check out our latest analysis for Balmer Lawrie

Historical performance is a great place to start when researching a stock so above you can see the gauge for Balmer Lawrie's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Balmer Lawrie, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Balmer Lawrie's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Balmer Lawrie. In light of this, the stock has only gained 1.9% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified 2 warning signs with Balmer Lawrie (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.