Aditya Birla Fashion and Retail (NSE:ABFRL) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Aditya Birla Fashion and Retail (NSE:ABFRL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Aditya Birla Fashion and Retail:

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

0.038 = ₹3.8b ÷ (₹170b - ₹71b) (Based on the trailing twelve months to March 2023).

Therefore, Aditya Birla Fashion and Retail has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

Check out our latest analysis for Aditya Birla Fashion and Retail

Above you can see how the current ROCE for Aditya Birla Fashion and Retail compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Aditya Birla Fashion and Retail

What Does the ROCE Trend For Aditya Birla Fashion and Retail Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 7.5% five years ago, while capital employed has grown 288%. Usually this isn't ideal, but given Aditya Birla Fashion and Retail conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Aditya Birla Fashion and Retail probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Aditya Birla Fashion and Retail has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Aditya Birla Fashion and Retail's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Aditya Birla Fashion and Retail. These trends are starting to be recognized by investors since the stock has delivered a 37% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Aditya Birla Fashion and Retail could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

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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.