Greenchef Appliances (NSE:GREENCHEF) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Greenchef Appliances (NSE:GREENCHEF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Greenchef Appliances is:

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

0.075 = ₹106m ÷ (₹2.9b - ₹1.5b) (Based on the trailing twelve months to March 2024).

Therefore, Greenchef Appliances has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 12%.

See our latest analysis for Greenchef Appliances

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 , check out these free graphs detailing revenue and cash flow performance of Greenchef Appliances.

What Can We Tell From Greenchef Appliances' ROCE Trend?

In terms of Greenchef Appliances' historical ROCE trend, it doesn't exactly demand attention. The company has employed 82% more capital in the last four years, and the returns on that capital have remained stable at 7.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last four years. This is intriguing because if current liabilities hadn't increased to 51% of total assets, this reported ROCE would probably be less than7.5% because total capital employed would be higher.The 7.5% ROCE could be even lower if current liabilities weren't 51% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

In Conclusion...

Long story short, while Greenchef Appliances has been reinvesting its capital, the returns that it's generating haven't increased. And in the last year, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Greenchef Appliances has the makings of a multi-bagger.

Greenchef Appliances does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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

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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.