Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Emkay Taps and Cutting Tools, this is the formula:

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

0.11 = ₹144m ÷ (₹1.4b - ₹73m) (Based on the trailing twelve months to September 2020).

So, Emkay Taps and Cutting Tools has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.

View our latest analysis for Emkay Taps and Cutting Tools

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 Emkay Taps and Cutting Tools has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Emkay Taps and Cutting Tools' ROCE Trend?

In terms of Emkay Taps and Cutting Tools' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 26% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Emkay Taps and Cutting Tools' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 8.4% over the last three 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Emkay Taps and Cutting Tools (of which 1 can't be ignored!) that you should know about.

While Emkay Taps and Cutting Tools 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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