IFB Industries (NSE:IFBIND) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at IFB Industries (NSE:IFBIND), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 IFB Industries is:

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

0.0053 = ₹51m ÷ (₹20b - ₹11b) (Based on the trailing twelve months to June 2022).

So, IFB Industries has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 16%.

View our latest analysis for IFB Industries

Above you can see how the current ROCE for IFB Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering IFB Industries here for free.

What Can We Tell From IFB Industries' ROCE Trend?

On the surface, the trend of ROCE at IFB Industries doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 0.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, IFB Industries' current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that IFB Industries is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 24% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

While IFB Industries doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While IFB Industries 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.