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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Greenchef Appliances (NSE:GREENCHEF), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Greenchef Appliances, this is the formula:

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

0.079 = ₹119m ÷ (₹2.7b - ₹1.2b) (Based on the trailing twelve months to September 2024).

Therefore, Greenchef Appliances has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.

See our latest analysis for Greenchef Appliances

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

What Can We Tell From Greenchef Appliances' ROCE Trend?

There are better returns on capital out there than what we're seeing at Greenchef Appliances. The company has employed 81% more capital in the last four years, and the returns on that capital have remained stable at 7.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that Greenchef Appliances has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Greenchef Appliances' ROCE

Long story short, while Greenchef Appliances has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 31% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Greenchef Appliances does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Greenchef Appliances 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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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.