Is Murudeshwar Ceramics (NSE:MURUDCERA) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Murudeshwar Ceramics (NSE:MURUDCERA) we aren't filled with optimism, but let's investigate further.

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 Murudeshwar Ceramics is:

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

0.03 = ₹108m ÷ (₹4.7b - ₹1.1b) (Based on the trailing twelve months to March 2020).

Thus, Murudeshwar Ceramics has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Building industry average of 13%.

View our latest analysis for Murudeshwar Ceramics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Murudeshwar Ceramics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Murudeshwar Ceramics, check out these free graphs here.

The Trend Of ROCE

In terms of Murudeshwar Ceramics' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Murudeshwar Ceramics becoming one if things continue as they have.

What We Can Learn From Murudeshwar Ceramics' ROCE

In summary, it's unfortunate that Murudeshwar Ceramics is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 36% depreciation in their investment, so it appears the market might not like these trends either. Unless these trends revert to a more positive trajectory, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Murudeshwar Ceramics that you might find interesting.

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This article by Simply Wall St is general in nature. 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.
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