Exxaro Tiles (NSE:EXXARO) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Exxaro Tiles (NSE:EXXARO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Exxaro Tiles, this is the formula:

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

0.034 = ₹101m ÷ (₹4.9b - ₹2.0b) (Based on the trailing twelve months to September 2024).

Thus, Exxaro Tiles has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Building industry average of 16%.

Check out our latest analysis for Exxaro Tiles

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 Exxaro Tiles has performed in the past in other metrics, you can view this free graph of Exxaro Tiles' past earnings, revenue and cash flow.

What Does the ROCE Trend For Exxaro Tiles Tell Us?

In terms of Exxaro Tiles' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. 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.

The Key Takeaway

In summary, we're somewhat concerned by Exxaro Tiles' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Exxaro Tiles does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Exxaro Tiles 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. 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.