Banaras Beads Limited (NSE:BANARBEADS): Assessing Capital Returns

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Banaras Beads Limited (NSE:BANARBEADS).

If you purchase a BANARBEADS share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to BANARBEADS’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Banaras Beads’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Banaras Beads

Banaras Beads’s Return On Capital Employed

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Banaras Beads’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. BANARBEADS’s ROCE is calculated below:

ROCE Calculation for BANARBEADS

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = ₹20m ÷ (₹488m – ₹38m) = 4.4%

BANARBEADS’s 4.4% ROCE means that for every ₹100 you invest, the company creates ₹4.4. Comparing this to a healthy 15% benchmark shows Banaras Beads is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

NSEI:BANARBEADS Last Perf November 8th 18
NSEI:BANARBEADS Last Perf November 8th 18

What is causing this?

The underperforming ROCE is not ideal for Banaras Beads investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, BANARBEADS’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you’ll find that BANARBEADS’s ROCE has decreased from 6.2%. The movement in the earnings variable over this time shows a fall from ₹26m to ₹20m whilst capital employed has increased due to a smaller amount of current liabilities used (meaning the company has used less borrowed money than shareholder capital to produce earnings) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

ROCE for BANARBEADS investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

  1. Future Outlook: What are well-informed industry analysts predicting for BANARBEADS’s future growth? Take a look at our free research report of analyst consensus for BANARBEADS’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Banaras Beads’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.