Returns On Capital At Indian Terrain Fashions (NSE:INDTERRAIN) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Indian Terrain Fashions (NSE:INDTERRAIN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Indian Terrain Fashions:

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

0.017 = ₹53m ÷ (₹5.0b - ₹2.0b) (Based on the trailing twelve months to March 2020).

So, Indian Terrain Fashions has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.2%.

View our latest analysis for Indian Terrain Fashions

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Indian Terrain Fashions, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 1.7%. 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.

The Bottom Line On Indian Terrain Fashions' ROCE

In summary, we're somewhat concerned by Indian Terrain Fashions' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 74% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Indian Terrain Fashions we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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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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