Returns On Capital At Ambika Cotton Mills (NSE:AMBIKCO) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Ambika Cotton Mills (NSE:AMBIKCO) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 Ambika Cotton Mills:

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

0.12 = ₹630m ÷ (₹6.3b - ₹900m) (Based on the trailing twelve months to June 2020).

So, Ambika Cotton Mills has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.6% it's much better.

View our latest analysis for Ambika Cotton Mills

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ambika Cotton Mills has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ambika Cotton Mills' ROCE Trending?

In terms of Ambika Cotton Mills' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Ambika Cotton Mills have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Ambika Cotton Mills, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Ambika Cotton Mills 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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