There Are Reasons To Feel Uneasy About Damodar Industries' (NSE:DAMODARIND) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Damodar Industries (NSE:DAMODARIND) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Damodar Industries is:

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

0.10 = ₹278m ÷ (₹3.9b - ₹1.1b) (Based on the trailing twelve months to December 2022).

So, Damodar Industries has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 12%.

Check out our latest analysis for Damodar Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Damodar Industries' ROCE against it's prior returns. If you're interested in investigating Damodar Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Damodar Industries Tell Us?

On the surface, the trend of ROCE at Damodar Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 21% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Damodar Industries' ROCE

We're a bit apprehensive about Damodar Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 34% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Damodar Industries, we've spotted 5 warning signs, and 1 of them is a bit concerning.

While Damodar Industries 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.