There Are Reasons To Feel Uneasy About A B Cotspin India's (NSE:ABCOTS) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think A B Cotspin India (NSE:ABCOTS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 A B Cotspin India, this is the formula:

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

0.056 = ₹55m ÷ (₹1.5b - ₹514m) (Based on the trailing twelve months to March 2023).

So, A B Cotspin India has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 10%.

View our latest analysis for A B Cotspin India

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

The Trend Of ROCE

On the surface, the trend of ROCE at A B Cotspin India doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, A B Cotspin India has decreased its current liabilities to 34% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

While returns have fallen for A B Cotspin India in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 164% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about A B Cotspin India, we've spotted 5 warning signs, and 3 of them are potentially serious.

While A B Cotspin India 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.