What Do The Returns On Capital At Amber Enterprises India (NSE:AMBER) Tell Us?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Amber Enterprises India (NSE:AMBER), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Amber Enterprises India is:

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

0.058 = ₹1.0b ÷ (₹25b - ₹7.6b) (Based on the trailing twelve months to September 2020).

Therefore, Amber Enterprises India has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

View our latest analysis for Amber Enterprises India

In the above chart we have measured Amber Enterprises India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Amber Enterprises India here for free.

What Can We Tell From Amber Enterprises India's ROCE Trend?

When we looked at the ROCE trend at Amber Enterprises India, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Amber Enterprises India has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Amber Enterprises India's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Amber Enterprises India have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 126% over the last year, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Amber Enterprises India does come with some risks, and we've found 3 warning signs that you should be aware of.

While Amber Enterprises 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. 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.
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