Returns On Capital At Lambodhara Textiles (NSE:LAMBODHARA) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Lambodhara Textiles (NSE:LAMBODHARA), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Lambodhara Textiles, this is the formula:

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

0.038 = ₹63m ÷ (₹1.9b - ₹265m) (Based on the trailing twelve months to June 2024).

Thus, Lambodhara Textiles has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

Check out our latest analysis for Lambodhara Textiles

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lambodhara Textiles' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Lambodhara Textiles.

What Can We Tell From Lambodhara Textiles' ROCE Trend?

On the surface, the trend of ROCE at Lambodhara Textiles doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.8% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Lambodhara Textiles has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Lambodhara Textiles' ROCE

In summary, Lambodhara Textiles is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 387% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Lambodhara Textiles, we've spotted 4 warning signs, and 1 of them is concerning.

While Lambodhara Textiles may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.