Will Ganesha Ecosphere (NSE:GANECOS) Multiply In Value Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ganesha Ecosphere (NSE:GANECOS), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Ganesha Ecosphere, this is the formula:

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 8.6% average generated by the Luxury industry.

See our latest analysis for Ganesha Ecosphere

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 Ganesha Ecosphere, check out these free graphs here.

What Can We Tell From Ganesha Ecosphere's ROCE Trend?

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 side note, Ganesha Ecosphere has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Ganesha Ecosphere's ROCE

In summary, we're somewhat concerned by Ganesha Ecosphere's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 242%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Ganesha Ecosphere does come with some risks, and we've found 1 warning sign that you should be aware of.

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

When trading Ganesha Ecosphere or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.