Aditya Birla Fashion and Retail's (NSE:ABFRL) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Aditya Birla Fashion and Retail's (NSE:ABFRL) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.098 = ₹7.5b ÷ (₹155b - ₹77b) (Based on the trailing twelve months to September 2022).

Therefore, Aditya Birla Fashion and Retail has an ROCE of 9.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 14%.

Check out our latest analysis for Aditya Birla Fashion and Retail

In the above chart we have measured Aditya Birla Fashion and Retail's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 241% more capital is being employed now too. So we're very much inspired by what we're seeing at Aditya Birla Fashion and Retail thanks to its ability to profitably reinvest capital.

Another thing to note, Aditya Birla Fashion and Retail has a high ratio of current liabilities to total assets of 50%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Aditya Birla Fashion and Retail's ROCE

All in all, it's terrific to see that Aditya Birla Fashion and Retail is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 123% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Aditya Birla Fashion and Retail can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Aditya Birla Fashion and Retail and understanding it should be part of your investment process.

While Aditya Birla Fashion and Retail 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.