Exxaro Tiles (NSE:EXXARO) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Exxaro Tiles (NSE:EXXARO), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Exxaro Tiles:

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

0.031 = ₹96m ÷ (₹4.9b - ₹1.8b) (Based on the trailing twelve months to June 2024).

So, Exxaro Tiles has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Building industry average of 18%.

View our latest analysis for Exxaro Tiles

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

So How Is Exxaro Tiles' ROCE Trending?

On the surface, the trend of ROCE at Exxaro Tiles doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.1% from 12% 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Exxaro Tiles have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 38% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Exxaro Tiles does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.