Returns On Capital At Lagnam Spintex (NSE:LAGNAM) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Lagnam Spintex (NSE:LAGNAM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Lagnam Spintex is:

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

0.075 = ₹250m ÷ (₹4.5b - ₹1.2b) (Based on the trailing twelve months to December 2023).

So, Lagnam Spintex has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

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 covering Lagnam Spintex's past earnings, revenue and cash flow.

So How Is Lagnam Spintex's ROCE Trending?

There are better returns on capital out there than what we're seeing at Lagnam Spintex. The company has employed 209% more capital in the last five years, and the returns on that capital have remained stable at 7.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Lagnam Spintex's ROCE

In conclusion, Lagnam Spintex has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 786% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger 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 shouldn't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.