Some Investors May Be Worried About IndiaMART InterMESH's (NSE:INDIAMART) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating IndiaMART InterMESH (NSE:INDIAMART), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on IndiaMART InterMESH is:

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

0.099 = ₹2.3b ÷ (₹30b - ₹7.0b) (Based on the trailing twelve months to December 2022).

So, IndiaMART InterMESH has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 6.6%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for IndiaMART InterMESH.

SWOT Analysis for IndiaMART InterMESH

What Does the ROCE Trend For IndiaMART InterMESH Tell Us?

When we looked at the ROCE trend at IndiaMART InterMESH, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, IndiaMART InterMESH has decreased its current liabilities to 23% of total assets. Considering it used to be 73%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

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. And long term investors must be optimistic going forward because the stock has returned a huge 152% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with IndiaMART InterMESH and understanding it should be part of your investment process.

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.