Returns On Capital At Bannari Amman Spinning Mills (NSE:BASML) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Bannari Amman Spinning Mills (NSE:BASML), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Bannari Amman Spinning Mills, this is the formula:

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

0.013 = ₹69m ÷ (₹11b - ₹5.9b) (Based on the trailing twelve months to September 2020).

Thus, Bannari Amman Spinning Mills has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.7%.

See 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're interested in investigating Bannari Amman Spinning Mills' past further, check out this free graph of past earnings, revenue and cash flow.

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

In terms of Bannari Amman Spinning Mills' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bannari Amman Spinning Mills becoming one if things continue as they have.

On a side note, Bannari Amman Spinning Mills' current liabilities have increased over the last five years to 52% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with Bannari Amman Spinning Mills (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.

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.

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