Has KDDL (NSE:KDDL) Got What It Takes To Become A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 KDDL (NSE:KDDL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 KDDL is:

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

0.0082 = ₹30m ÷ (₹5.9b - ₹2.2b) (Based on the trailing twelve months to September 2020).

So, KDDL has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.5%.

View our latest analysis for KDDL

Historical performance is a great place to start when researching a stock so above you can see the gauge for KDDL's ROCE against it's prior returns. If you're interested in investigating KDDL's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For KDDL Tell Us?

When we looked at the ROCE trend at KDDL, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 0.8%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, KDDL has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for KDDL have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 32% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for KDDL (of which 2 are a bit unpleasant!) that you should know about.

While KDDL 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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