There Are Reasons To Feel Uneasy About Shaily Engineering Plastics' (NSE:SHAILY) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shaily Engineering Plastics (NSE:SHAILY), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Shaily Engineering Plastics:

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

0.11 = ₹558m ÷ (₹7.4b - ₹2.5b) (Based on the trailing twelve months to December 2022).

Thus, Shaily Engineering Plastics has an ROCE of 11%. In isolation, that's a pretty standard return but against the Machinery industry average of 16%, it's not as good.

Check out our latest analysis for Shaily Engineering Plastics

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

So How Is Shaily Engineering Plastics' ROCE Trending?

In terms of Shaily Engineering Plastics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 27% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shaily Engineering Plastics. These growth trends haven't led to growth returns though, since the stock has fallen 28% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for Shaily Engineering Plastics that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.