Kothari Products (NSE:KOTHARIPRO) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Kothari Products (NSE:KOTHARIPRO), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Kothari Products is:

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

0.064 = ₹936m ÷ (₹21b - ₹6.1b) (Based on the trailing twelve months to December 2021).

So, Kothari Products has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 6.9%.

See our latest analysis for Kothari Products

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Kothari Products' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kothari Products' ROCE Trend?

On the surface, the trend of ROCE at Kothari Products doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.4% from 17% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Kothari Products has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. 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. 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.

Our Take On Kothari Products' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kothari Products is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 53% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Kothari Products does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While Kothari Products 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.