Garware Technical Fibres (NSE:GARFIBRES) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Garware Technical Fibres (NSE:GARFIBRES) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Garware Technical Fibres, this is the formula:

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

0.18 = ₹1.5b ÷ (₹13b - ₹4.5b) (Based on the trailing twelve months to December 2020).

Thus, Garware Technical Fibres has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 9.5% it's much better.

Check out our latest analysis for Garware Technical Fibres

Above you can see how the current ROCE for Garware Technical Fibres compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Garware Technical Fibres.

What Can We Tell From Garware Technical Fibres' ROCE Trend?

When we looked at the ROCE trend at Garware Technical Fibres, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Garware Technical Fibres might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Garware Technical Fibres has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Garware Technical Fibres' ROCE

To conclude, we've found that Garware Technical Fibres is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 714% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Garware Technical Fibres could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Garware Technical Fibres 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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