Bombay Dyeing and Manufacturing (NSE:BOMDYEING) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think Bombay Dyeing and Manufacturing (NSE:BOMDYEING) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Bombay Dyeing and Manufacturing is:

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

0.061 = ₹1.5b ÷ (₹42b - ₹18b) (Based on the trailing twelve months to March 2022).

So, Bombay Dyeing and Manufacturing has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.

View our latest analysis for Bombay Dyeing and Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bombay Dyeing and Manufacturing's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Bombay Dyeing and Manufacturing, check out these free graphs here.

What Does the ROCE Trend For Bombay Dyeing and Manufacturing Tell Us?

On the surface, the trend of ROCE at Bombay Dyeing and Manufacturing doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Bombay Dyeing and Manufacturing has done well to pay down its current liabilities to 43% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bombay Dyeing and Manufacturing. In light of this, the stock has only gained 24% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Bombay Dyeing and Manufacturing, we've spotted 4 warning signs, and 3 of them are concerning.

While Bombay Dyeing and Manufacturing 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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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.