Investors Could Be Concerned With IndiaMART InterMESH's (NSE:INDIAMART) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at IndiaMART InterMESH (NSE:INDIAMART), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for IndiaMART InterMESH:

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

0.13 = ₹2.7b ÷ (₹30b - ₹8.8b) (Based on the trailing twelve months to September 2023).

Thus, IndiaMART InterMESH has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 4.9% it's much better.

See our latest analysis for IndiaMART InterMESH

In the above chart we have measured IndiaMART InterMESH's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at IndiaMART InterMESH, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, IndiaMART InterMESH has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On IndiaMART InterMESH's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that IndiaMART InterMESH is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 11% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 2 warning signs for IndiaMART InterMESH you'll probably want to know about.

While IndiaMART InterMESH may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.