Is Butterfly Gandhimathi Appliances (NSE:BUTTERFLY) Struggling?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Butterfly Gandhimathi Appliances (NSE:BUTTERFLY), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Butterfly Gandhimathi Appliances:

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

0.10 = ₹237m ÷ (₹4.8b - ₹2.4b) (Based on the trailing twelve months to September 2020).

So, Butterfly Gandhimathi Appliances has an ROCE of 10.0%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 11%.

View our latest analysis for Butterfly Gandhimathi Appliances

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're interested in investigating Butterfly Gandhimathi Appliances' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Butterfly Gandhimathi Appliances' ROCE Trending?

The trend of ROCE at Butterfly Gandhimathi Appliances is showing some signs of weakness. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a related note, Butterfly Gandhimathi Appliances has decreased its current liabilities to 50% 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 50% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, it's unfortunate that Butterfly Gandhimathi Appliances is shrinking its capital base and also generating lower returns. Since the stock has skyrocketed 132% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 4 warning signs for Butterfly Gandhimathi Appliances (1 is significant) you should be aware of.

While Butterfly Gandhimathi Appliances isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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