IFB Industries (NSE:IFBIND) Will Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating IFB Industries (NSE:IFBIND), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for IFB Industries, this is the formula:

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

0.038 = ₹389m ÷ (₹18b - ₹7.8b) (Based on the trailing twelve months to December 2020).

Therefore, IFB Industries has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

See our latest analysis for IFB Industries

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, revenue and cash flow of IFB Industries, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at IFB Industries, we didn't gain much confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 3.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that IFB Industries has a current liabilities to total assets ratio of 44%, 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.

The Bottom Line On IFB Industries' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for IFB Industries have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 157% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about IFB Industries, we've spotted 3 warning signs, and 2 of them are potentially serious.

While IFB Industries 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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