Lexus Granito (India)'s (NSE:LEXUS) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Lexus Granito (India) (NSE:LEXUS) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Lexus Granito (India), this is the formula:

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

0.037 = ₹35m ÷ (₹1.8b - ₹885m) (Based on the trailing twelve months to March 2020).

Therefore, Lexus Granito (India) has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

See our latest analysis for Lexus Granito (India)

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

What Can We Tell From Lexus Granito (India)'s ROCE Trend?

When we looked at the ROCE trend at Lexus Granito (India), we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 3.7%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Another thing to note, Lexus Granito (India) has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Lexus Granito (India)'s ROCE

In summary, we're somewhat concerned by Lexus Granito (India)'s diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 81% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 5 warning signs with Lexus Granito (India) (at least 3 which make us uncomfortable) , and understanding them would certainly be useful.

While Lexus Granito (India) 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. 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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