Should We Be Excited About The Trends Of Returns At Bhandari Hosiery Exports (NSE:BHANDARI)?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Bhandari Hosiery Exports (NSE:BHANDARI) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Bhandari Hosiery Exports is:

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

0.11 = ₹127m ÷ (₹2.1b - ₹920m) (Based on the trailing twelve months to September 2020).

Thus, Bhandari Hosiery Exports has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.3% it's much better.

See our latest analysis for Bhandari Hosiery Exports

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 Bhandari Hosiery Exports, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Bhandari Hosiery Exports, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, Bhandari Hosiery Exports' current liabilities are still rather high at 44% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Bhandari Hosiery Exports' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Bhandari Hosiery Exports have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Bhandari Hosiery Exports (including 2 which are a bit concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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