Stock Analysis

Some Investors May Be Worried About Blue Star's (NSE:BLUESTARCO) Returns On Capital

NSEI:BLUESTARCO
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 briefly looking over the numbers, we don't think Blue Star (NSE:BLUESTARCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Blue Star is:

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

0.16 = ₹2.1b ÷ (₹35b - ₹23b) (Based on the trailing twelve months to March 2021).

Thus, Blue Star has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 13% it's much better.

See our latest analysis for Blue Star

roce
NSEI:BLUESTARCO Return on Capital Employed July 6th 2021

Above you can see how the current ROCE for Blue Star compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Blue Star.

The Trend Of ROCE

When we looked at the ROCE trend at Blue Star, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Another thing to note, Blue Star has a high ratio of current liabilities to total assets of 64%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Blue Star's ROCE

We're a bit apprehensive about Blue Star because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 104%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Blue Star, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Blue Star 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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Valuation is complex, but we're here to simplify it.

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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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