Be Wary Of Ganesha Ecosphere (NSE:GANECOS) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ganesha Ecosphere (NSE:GANECOS) and its ROCE trend, we weren't exactly thrilled.

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 Ganesha Ecosphere:

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

0.078 = ₹430m ÷ (₹7.0b - ₹1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Ganesha Ecosphere has an ROCE of 7.8%. On its own, that's a low figure but it's around the 9.7% average generated by the Luxury industry.

Check out our latest analysis for Ganesha Ecosphere

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

What Does the ROCE Trend For Ganesha Ecosphere Tell Us?

When we looked at the ROCE trend at Ganesha Ecosphere, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.8%. 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.

On a related note, Ganesha Ecosphere has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Key Takeaway

We're a bit apprehensive about Ganesha Ecosphere because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 240% 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.

While Ganesha Ecosphere doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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