Will Ambika Cotton Mills (NSE:AMBIKCO) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Ambika Cotton Mills (NSE:AMBIKCO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ambika Cotton Mills is:

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

0.14 = ₹749m ÷ (₹6.8b - ₹1.3b) (Based on the trailing twelve months to December 2020).

So, Ambika Cotton Mills has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 9.5% it's much better.

See 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 want to delve into the historical earnings, revenue and cash flow of Ambika Cotton Mills, check out these free graphs here.

What Does the ROCE Trend For Ambika Cotton Mills Tell Us?

In terms of Ambika Cotton Mills' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. However it looks like Ambika Cotton Mills might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Ambika Cotton Mills' ROCE

To conclude, we've found that Ambika Cotton Mills is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Ambika Cotton Mills does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

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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