Returns On Capital At Butterfly Gandhimathi Appliances (NSE:BUTTERFLY) Have Hit The Brakes

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Butterfly Gandhimathi Appliances (NSE:BUTTERFLY), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Butterfly Gandhimathi Appliances is:

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

0.20 = ₹468m ÷ (₹4.8b - ₹2.4b) (Based on the trailing twelve months to December 2020).

Thus, Butterfly Gandhimathi Appliances has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Durables industry.

See our latest analysis for Butterfly Gandhimathi Appliances

Historical performance is a great place to start when researching a stock so above you can see the gauge for Butterfly Gandhimathi Appliances' ROCE against it's prior returns. If you'd like to look at how Butterfly Gandhimathi Appliances has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Butterfly Gandhimathi Appliances' ROCE Trend?

Over the past five years, Butterfly Gandhimathi Appliances' ROCE has remained relatively flat while the business is using 21% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. So if this trend continues, don't be surprised if the business is smaller in a few years time.

On a side note, Butterfly Gandhimathi Appliances has done well to reduce current liabilities to 50% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

It's a shame to see that Butterfly Gandhimathi Appliances is effectively shrinking in terms of its capital base. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 261% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Butterfly Gandhimathi Appliances we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. 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.
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