Himatsingka Seide (NSE:HIMATSEIDE) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Himatsingka Seide (NSE:HIMATSEIDE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Himatsingka Seide:

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

0.043 = ₹1.4b ÷ (₹51b - ₹19b) (Based on the trailing twelve months to March 2021).

So, Himatsingka Seide has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.7%.

View our latest analysis for Himatsingka Seide

In the above chart we have measured Himatsingka Seide's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Himatsingka Seide.

The Trend Of ROCE

On the surface, the trend of ROCE at Himatsingka Seide doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Himatsingka Seide is reinvesting in the business, but returns have been falling. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Himatsingka Seide does have some risks though, and we've spotted 1 warning sign for Himatsingka Seide that you might be interested in.

While Himatsingka Seide 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. 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.
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