The Returns On Capital At Bombay Dyeing and Manufacturing (NSE:BOMDYEING) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Bombay Dyeing and Manufacturing (NSE:BOMDYEING), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Bombay Dyeing and Manufacturing:

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

0.045 = ₹951m ÷ (₹44b - ₹23b) (Based on the trailing twelve months to September 2021).

Thus, Bombay Dyeing and Manufacturing has an ROCE of 4.5%. In absolute terms, that's a low return and it also 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 The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Bombay Dyeing and Manufacturing. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Bombay Dyeing and Manufacturing to turn into a multi-bagger.

Another thing to note, Bombay Dyeing and Manufacturing has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. 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. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 107%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Bombay Dyeing and Manufacturing we've found 4 warning signs (3 are a bit concerning!) that you should be aware of before investing here.

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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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.