Exxaro Tiles (NSE:EXXARO) Might Be Having Difficulty Using Its Capital Effectively

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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 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. Analysts use this formula to calculate it for Exxaro Tiles:

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

0.058 = ₹180m ÷ (₹4.7b - ₹1.6b) (Based on the trailing twelve months to June 2023).

Thus, Exxaro Tiles has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Building industry average of 16%.

Check out 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'd like to look at how Exxaro Tiles has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Exxaro Tiles, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Exxaro Tiles' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 3 warning signs for Exxaro Tiles you'll probably want to know about.

While Exxaro Tiles 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. 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.