Returns On Capital At Nahar Industrial Enterprises (NSE:NAHARINDUS) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Nahar Industrial Enterprises (NSE:NAHARINDUS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Nahar Industrial Enterprises, this is the formula:

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

0.14 = ₹1.2b ÷ (₹16b - ₹7.0b) (Based on the trailing twelve months to June 2021).

Therefore, Nahar Industrial Enterprises has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 12%.

Check out our latest analysis for Nahar Industrial Enterprises

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're interested in investigating Nahar Industrial Enterprises' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Nahar Industrial Enterprises' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Nahar Industrial Enterprises doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Nahar Industrial Enterprises has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In a nutshell, Nahar Industrial Enterprises has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 2 warning signs for Nahar Industrial Enterprises (1 is a bit concerning) you should be aware of.

While Nahar Industrial Enterprises isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.