Be Wary Of Saakshi Medtech and Panels (NSE:SAAKSHI) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Saakshi Medtech and Panels (NSE:SAAKSHI), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Saakshi Medtech and Panels is:

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

0.15 = ₹160m ÷ (₹1.3b - ₹206m) (Based on the trailing twelve months to March 2024).

Thus, Saakshi Medtech and Panels has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 17% generated by the Electrical industry.

Check out our latest analysis for Saakshi Medtech and Panels

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saakshi Medtech and Panels' ROCE against it's prior returns. If you'd like to look at how Saakshi Medtech and Panels has performed in the past in other metrics, you can view this free graph of Saakshi Medtech and Panels' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Saakshi Medtech and Panels, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Saakshi Medtech and Panels has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Saakshi Medtech and Panels is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Saakshi Medtech and Panels we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Saakshi Medtech and Panels isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.