The Trends At Lambodhara Textiles (NSE:LAMBODHARA) That You Should Know About

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Lambodhara Textiles (NSE:LAMBODHARA), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.093 = ₹98m ÷ (₹1.3b - ₹222m) (Based on the trailing twelve months to September 2020).

Therefore, Lambodhara Textiles has an ROCE of 9.3%. On its own, that's a low figure but it's around the 8.1% average generated by the Luxury industry.

View 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, revenue and cash flow of Lambodhara Textiles, check out these free graphs here.

How Are Returns Trending?

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 9.3% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From Lambodhara Textiles' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Lambodhara Textiles have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 85% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Lambodhara Textiles (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Lambodhara Textiles 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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