The Returns At Monte Carlo Fashions (NSE:MONTECARLO) Aren't Growing

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Monte Carlo Fashions (NSE:MONTECARLO) looks decent, right now, so lets see what the trend of returns can tell us.

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

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. The formula for this calculation on Monte Carlo Fashions is:

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

0.18 = ₹1.3b ÷ (₹12b - ₹4.9b) (Based on the trailing twelve months to September 2021).

So, Monte Carlo Fashions has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Luxury industry.

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 The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 44% more capital into its operations. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Monte Carlo Fashions' current liabilities are still rather high at 41% of total assets. 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 Monte Carlo Fashions' ROCE

The main thing to remember is that Monte Carlo Fashions has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 80% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Monte Carlo Fashions does have some risks though, and we've spotted 2 warning signs for Monte Carlo Fashions that you might be interested in.

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. 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.