Should We Be Excited About The Trends Of Returns At Kewal Kiran Clothing (NSE:KKCL)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kewal Kiran Clothing (NSE:KKCL), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Kewal Kiran Clothing:

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

0.054 = ₹240m ÷ (₹5.9b - ₹1.5b) (Based on the trailing twelve months to September 2020).

Therefore, Kewal Kiran Clothing has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.6%.

Check out our latest analysis for Kewal Kiran Clothing

Above you can see how the current ROCE for Kewal Kiran Clothing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kewal Kiran Clothing here for free.

So How Is Kewal Kiran Clothing's ROCE Trending?

When we looked at the ROCE trend at Kewal Kiran Clothing, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Kewal Kiran Clothing 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 60% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for Kewal Kiran Clothing that we think you should be aware of.

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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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