Returns On Capital At Kabra Extrusiontechnik (NSE:KABRAEXTRU) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Kabra Extrusiontechnik (NSE:KABRAEXTRU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Kabra Extrusiontechnik is:

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

0.066 = ₹178m ÷ (₹3.9b - ₹1.2b) (Based on the trailing twelve months to December 2020).

So, Kabra Extrusiontechnik has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

See our latest analysis for Kabra Extrusiontechnik

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kabra Extrusiontechnik's ROCE against it's prior returns. If you're interested in investigating Kabra Extrusiontechnik's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kabra Extrusiontechnik's ROCE Trend?

When we looked at the ROCE trend at Kabra Extrusiontechnik, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Kabra Extrusiontechnik have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 96% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Kabra Extrusiontechnik we've found 5 warning signs (1 is concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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