Here's What's Concerning About Exxaro Tiles' (NSE:EXXARO) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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. 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)

0.076 = ₹233m ÷ (₹4.4b - ₹1.3b) (Based on the trailing twelve months to December 2022).

Therefore, Exxaro Tiles has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Building industry average of 13%.

See 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.

What Does the ROCE Trend For Exxaro Tiles Tell Us?

On the surface, the trend of ROCE at Exxaro Tiles doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Exxaro Tiles might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Exxaro Tiles' ROCE

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. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Exxaro Tiles that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.