Should We Be Excited About The Trends Of Returns At Damodar Industries (NSE:DAMODARIND)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Damodar Industries (NSE:DAMODARIND), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Damodar Industries is:

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

0.013 = ₹36m ÷ (₹4.5b - ₹1.7b) (Based on the trailing twelve months to September 2020).

Thus, Damodar Industries has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.1%.

See our latest analysis for Damodar Industries

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 Damodar Industries, check out these free graphs here.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 31% five years ago, while the business's capital employed increased by 154%. That being said, Damodar Industries raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Damodar Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

In summary, we're somewhat concerned by Damodar Industries' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 51% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Damodar Industries we've found 5 warning signs (3 make us uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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