Here's What's Concerning About Lagnam Spintex's (NSE:LAGNAM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Lagnam Spintex (NSE:LAGNAM), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lagnam Spintex is:

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

0.096 = ₹183m ÷ (₹2.5b - ₹585m) (Based on the trailing twelve months to March 2021).

Therefore, Lagnam Spintex has an ROCE of 9.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.6%.

Check out our latest analysis for Lagnam Spintex

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

The Trend Of ROCE

When we looked at the ROCE trend at Lagnam Spintex, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.6% from 12% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Lagnam Spintex is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 245% return over the last year, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Lagnam Spintex (of which 2 don't sit too well with us!) that you should know about.

While Lagnam Spintex 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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