Investors Could Be Concerned With Nahar Industrial Enterprises' (NSE:NAHARINDUS) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Nahar Industrial Enterprises (NSE:NAHARINDUS), we weren't too hopeful.

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 Nahar Industrial Enterprises:

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

0.0008 = ₹6.8m ÷ (₹14b - ₹5.4b) (Based on the trailing twelve months to December 2020).

Therefore, Nahar Industrial Enterprises has an ROCE of 0.08%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.6%.

Check out our latest analysis for Nahar Industrial Enterprises

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

What Can We Tell From Nahar Industrial Enterprises' ROCE Trend?

We are a bit worried about the trend of returns on capital at Nahar Industrial Enterprises. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Nahar Industrial Enterprises to turn into a multi-bagger.

Our Take On Nahar Industrial Enterprises' ROCE

In summary, it's unfortunate that Nahar Industrial Enterprises is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 17% 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.

Nahar Industrial Enterprises does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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