Bombay Dyeing and Manufacturing (NSE:BOMDYEING) Will Be Looking To Turn Around Its Returns

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 Bombay Dyeing and Manufacturing (NSE:BOMDYEING), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Bombay Dyeing and Manufacturing, this is the formula:

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

0.068 = ₹1.3b ÷ (₹38b - ₹19b) (Based on the trailing twelve months to December 2022).

Therefore, Bombay Dyeing and Manufacturing has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

View our latest analysis for Bombay Dyeing and Manufacturing

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 Bombay Dyeing and Manufacturing, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Bombay Dyeing and Manufacturing, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 23% that they were earning five years ago. 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 Bombay Dyeing and Manufacturing becoming one if things continue as they have.

On a side note, Bombay Dyeing and Manufacturing's current liabilities are still rather high at 49% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Bombay Dyeing and Manufacturing's ROCE

In summary, it's unfortunate that Bombay Dyeing and Manufacturing is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 72% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Bombay Dyeing and Manufacturing (at least 3 which are a bit concerning) , and understanding them would certainly be useful.

While Bombay Dyeing and Manufacturing isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.