Some Investors May Be Worried 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Exxaro Tiles (NSE:EXXARO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Exxaro Tiles is:

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

0.056 = ₹173m ÷ (₹5.0b - ₹1.9b) (Based on the trailing twelve months to December 2023).

So, Exxaro Tiles has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Building industry average of 17%.

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 Exxaro Tiles' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Exxaro Tiles' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

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. Since the stock has declined 14% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Exxaro Tiles we've found 5 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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.