What These Trends Mean At Nagreeka Exports (NSE:NAGREEKEXP)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Nagreeka Exports (NSE:NAGREEKEXP), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Nagreeka Exports:

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

0.014 = ₹20m ÷ (₹3.6b - ₹2.2b) (Based on the trailing twelve months to June 2020).

So, Nagreeka Exports has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.0%.

See our latest analysis for Nagreeka Exports

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'd like to look at how Nagreeka Exports has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nagreeka Exports' ROCE Trend?

The trend of returns that Nagreeka Exports is generating are raising some concerns. The company used to generate 9.2% on its capital five years ago but it has since fallen noticeably. In addition to that, Nagreeka Exports is now employing 22% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Nagreeka Exports' current liabilities have increased over the last five years to 61% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, it's unfortunate that Nagreeka Exports is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 55% over the last five years, so it looks like investors are recognizing these changes. 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 more about Nagreeka Exports, we've spotted 4 warning signs, and 3 of them shouldn't be ignored.

While Nagreeka Exports 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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