Godrej Industries (NSE:GODREJIND) Hasn't Managed To Accelerate Its Returns

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. 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. Having said that, from a first glance at Godrej Industries (NSE:GODREJIND) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Godrej Industries:

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

0.09 = ₹22b ÷ (₹523b - ₹276b) (Based on the trailing twelve months to December 2023).

So, Godrej Industries has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Industrials industry average of 13%.

View our latest analysis for Godrej Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Godrej Industries' ROCE against it's prior returns. If you'd like to look at how Godrej Industries has performed in the past in other metrics, you can view this free graph of Godrej Industries' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Godrej Industries. The company has employed 237% more capital in the last five years, and the returns on that capital have remained stable at 9.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Godrej Industries' current liabilities are still rather high at 53% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In conclusion, Godrej Industries has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Godrej Industries does have some risks though, and we've spotted 1 warning sign for Godrej Industries that you might be interested in.

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.