Returns On Capital Signal Difficult Times Ahead For Sanghvi Movers (NSE:SANGHVIMOV)

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Sanghvi Movers (NSE:SANGHVIMOV), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sanghvi Movers, this is the formula:

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

0.0041 = ₹35m ÷ (₹9.6b - ₹907m) (Based on the trailing twelve months to June 2021).

Thus, Sanghvi Movers has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.0%.

Check out our latest analysis for Sanghvi Movers

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 want to delve into the historical earnings, revenue and cash flow of Sanghvi Movers, check out these free graphs here.

So How Is Sanghvi Movers' ROCE Trending?

The trend of ROCE at Sanghvi Movers is showing some signs of weakness. The company used to generate 18% on its capital five years ago but it has since fallen noticeably. In addition to that, Sanghvi Movers is now employing 34% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Sanghvi Movers' ROCE

In summary, it's unfortunate that Sanghvi Movers is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Sanghvi Movers does have some risks though, and we've spotted 1 warning sign for Sanghvi Movers that you might be interested in.

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

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.

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