I am writing today to help inform people who are new to the stock market and want to begin learning the link between Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU)’s return fundamentals and stock market performance.
Kabra Extrusiontechnik stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to KABRAEXTRU’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Kabra Extrusiontechnik, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
ROCE: Explanation and Calculation
Choosing to invest in Kabra Extrusiontechnik comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Kabra Extrusiontechnik’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). KABRAEXTRU’s ROCE is calculated below:
ROCE Calculation for KABRAEXTRU
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹199m ÷ (₹3.4b – ₹1.0b) = 8.4%
The calculation above shows that KABRAEXTRU’s earnings were 8.4% of capital employed. This shows Kabra Extrusiontechnik provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if KABRAEXTRU is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
Why is this the case?
KABRAEXTRU doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of KABRAEXTRU’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that KABRAEXTRU weakened investor return on capital employed from 14%. In this time, earnings have fallen from ₹212m to ₹199m and capital employed has increased due to a rise in total assets and a smaller reliance on current liabilities (less borrowing to fund operations) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
Kabra Extrusiontechnik’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Kabra Extrusiontechnik’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for KABRAEXTRU’s future growth? Take a look at our free research report of analyst consensus for KABRAEXTRU’s outlook.
- Valuation: What is KABRAEXTRU worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether KABRAEXTRU is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.