Should You Be Impressed By Lagnam Spintex's (NSE:LAGNAM) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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.

What is 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 Lagnam Spintex:

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

0.057 = ₹96m ÷ (₹2.4b - ₹736m) (Based on the trailing twelve months to March 2020).

So, Lagnam Spintex has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.5%.

See our latest analysis for Lagnam Spintex

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're interested in investigating Lagnam Spintex's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lagnam Spintex's ROCE Trend?

When we looked at the ROCE trend at Lagnam Spintex, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Lagnam Spintex's ROCE

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. Furthermore the stock has climbed 26% over the last year, it would appear that investors are upbeat about the future. 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 know some of the risks facing Lagnam Spintex we've found 5 warning signs (3 can't be ignored!) that you should be aware of before investing here.

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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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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