Returns Are Gaining Momentum At Bannari Amman Spinning Mills (NSE:BASML)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Bannari Amman Spinning Mills (NSE:BASML) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Bannari Amman Spinning Mills:

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

0.17 = ₹956m ÷ (₹11b - ₹5.5b) (Based on the trailing twelve months to June 2021).

Thus, Bannari Amman Spinning Mills has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Luxury industry.

Check out our latest analysis for Bannari Amman Spinning Mills

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bannari Amman Spinning Mills' ROCE against it's prior returns. If you'd like to look at how Bannari Amman Spinning Mills has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Bannari Amman Spinning Mills' ROCE Trend?

Bannari Amman Spinning Mills' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 39% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Bannari Amman Spinning Mills has a high ratio of current liabilities to total assets of 49%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Bannari Amman Spinning Mills' ROCE

To bring it all together, Bannari Amman Spinning Mills has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 5 warning signs we've spotted with Bannari Amman Spinning Mills (including 2 which are a bit concerning) .

While Bannari Amman Spinning Mills may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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