Capital Allocation Trends At Kitex Garments (NSE:KITEX) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Kitex Garments (NSE:KITEX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

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 Kitex Garments:

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

0.078 = ₹1.8b ÷ (₹26b - ₹2.9b) (Based on the trailing twelve months to June 2025).

Therefore, Kitex Garments has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

View our latest analysis for Kitex Garments

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 , check out these free graphs detailing revenue and cash flow performance of Kitex Garments.

The Trend Of ROCE

When we looked at the ROCE trend at Kitex Garments, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 7.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Kitex Garments' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kitex Garments is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 472% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Kitex Garments, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Kitex Garments 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. 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.