Should We Be Excited About The Trends Of Returns At IFB Industries (NSE:IFBIND)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think IFB Industries (NSE:IFBIND) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

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

So, IFB Industries has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

Check out our latest analysis for IFB Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for IFB Industries' ROCE against it's prior returns. If you'd like to look at how IFB Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From IFB Industries' ROCE Trend?

When we looked at the ROCE trend at IFB Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, IFB Industries has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. 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 282% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for IFB Industries (of which 2 are potentially serious!) that you should know about.

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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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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