Stock Analysis

What These Trends Mean At Everest Industries (NSE:EVERESTIND)

NSEI:EVERESTIND
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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Everest Industries (NSE:EVERESTIND), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Everest Industries:

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

0.035 = ₹185m ÷ (₹8.5b - ₹3.1b) (Based on the trailing twelve months to March 2020).

So, Everest Industries has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Building industry average of 14%.

Check out our latest analysis for Everest Industries

NSEI:EVERESTIND Past Revenue and Net Income June 26th 2020
NSEI:EVERESTIND Past Revenue and Net Income June 26th 2020

Historical performance is a great place to start when researching a stock so above you can see the gauge for Everest Industries' ROCE against it's prior returns. If you're interested in investigating Everest Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Everest Industries Tell Us?

There is reason to be cautious about Everest Industries, given the returns are trending downwards. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Everest Industries becoming one if things continue as they have.

On a related note, Everest Industries has decreased its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Everest Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Everest Industries, we've discovered 3 warning signs that you should be aware of.

While Everest Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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