Should You Be Impressed By Monte Carlo Fashions' (NSE:MONTECARLO) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Monte Carlo Fashions (NSE:MONTECARLO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Monte Carlo Fashions, this is the formula:

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

0.11 = ₹733m ÷ (₹9.4b - ₹3.0b) (Based on the trailing twelve months to September 2020).

So, Monte Carlo Fashions has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.1% it's much better.

View our latest analysis for Monte Carlo Fashions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Monte Carlo Fashions' ROCE against it's prior returns. If you're interested in investigating Monte Carlo Fashions' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Monte Carlo Fashions' ROCE Trend?

In terms of Monte Carlo Fashions' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. 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.

What We Can Learn From Monte Carlo Fashions' ROCE

Bringing it all together, while we're somewhat encouraged by Monte Carlo Fashions' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 37% in the last five years. Therefore based on the analysis done in this article, we don't think Monte Carlo Fashions has the makings of a multi-bagger.

One more thing to note, we've identified 3 warning signs with Monte Carlo Fashions and understanding these should be part of your investment process.

While Monte Carlo Fashions 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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