Garden Silk Mills Limited (NSE:GARDENSILK): A Look At Return On Capital

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Garden Silk Mills Limited (NSE:GARDENSILK) stock.

Purchasing Garden Silk Mills gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Garden Silk Mills’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

ROCE: Explanation and Calculation

Choosing to invest in Garden Silk Mills comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Garden Silk Mills’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). GARDENSILK’s ROCE is calculated below:

ROCE Calculation for GARDENSILK

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = -₹299.9m ÷ (₹19b – ₹13b) = 25%

As you can see, GARDENSILK earned ₹25.3 from every ₹100 you invested over the previous twelve months. This shows Garden Silk Mills provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if GARDENSILK is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.

Before moving forward

Garden Silk Mills’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Garden Silk Mills is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Garden Silk Mills will continue the solid returns. Three years ago, GARDENSILK’s ROCE was 1.1%, which means the company’s capital returns have improved. Similarly, the movement in the earnings variable shows a jump from -₹1.8b to -₹299.9m whilst the amount of capital employed has declined in response to a decreased level of total assets and increase in current liabilities (more borrowed money) , which means that ROCE has increased as a result of Garden Silk Mills’s ability to grow earnings in conjunction with increased capital efficiency.

Next Steps

GARDENSILK’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Garden Silk Mills’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
2. Valuation: What is GARDENSILK worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GARDENSILK is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.