Sanghvi Movers (NSE:SANGHVIMOV) Could Be At Risk Of Shrinking As A Company

Simply Wall St
February 24, 2022
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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Sanghvi Movers (NSE:SANGHVIMOV), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.035 = ₹296m ÷ (₹9.3b - ₹869m) (Based on the trailing twelve months to December 2021).

Thus, Sanghvi Movers has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.9%.

See our latest analysis for Sanghvi Movers

NSEI:SANGHVIMOV Return on Capital Employed February 24th 2022

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 Sanghvi Movers' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sanghvi Movers' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 3.5% we see today. In addition to that, Sanghvi Movers is now employing 34% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Sanghvi Movers' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 16% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 3 warning signs with Sanghvi Movers (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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.

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