La Opala RG (NSE:LAOPALA) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at La Opala RG (NSE:LAOPALA), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for La Opala RG:

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

0.078 = ₹473m ÷ (₹6.3b - ₹264m) (Based on the trailing twelve months to December 2020).

So, La Opala RG has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

View our latest analysis for La Opala RG

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 want to delve into the historical earnings, revenue and cash flow of La Opala RG, check out these free graphs here.

So How Is La Opala RG's ROCE Trending?

On the surface, the trend of ROCE at La Opala RG doesn't inspire confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 7.8%. 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.

On a side note, La Opala RG has done well to pay down its current liabilities to 4.2% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On La Opala RG's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for La Opala RG have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing La Opala RG, we've discovered 2 warning signs that you should be aware of.

While La Opala RG 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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