The Returns At Indo Count Industries (NSE:ICIL) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Indo Count Industries (NSE:ICIL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Indo Count Industries is:

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

0.18 = ₹2.2b ÷ (₹17b - ₹4.9b) (Based on the trailing twelve months to December 2020).

Therefore, Indo Count Industries has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.7% it's much better.

View our latest analysis for Indo Count Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Indo Count Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Indo Count Industries, check out these free graphs here.

How Are Returns Trending?

In terms of Indo Count Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 54% 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.

On a related note, Indo Count Industries has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Indo Count Industries' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last five years. 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.

One final note, you should learn about the 2 warning signs we've spotted with Indo Count Industries (including 1 which is significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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