Nahar Spinning Mills (NSE:NAHARSPING) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Nahar Spinning Mills (NSE:NAHARSPING) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nahar Spinning Mills:

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

0.011 = ₹111m ÷ (₹16b - ₹6.1b) (Based on the trailing twelve months to December 2020).

So, Nahar Spinning Mills has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.6%.

Check out our latest analysis for Nahar Spinning Mills

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 Spinning Mills' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Nahar Spinning Mills. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nahar Spinning Mills becoming one if things continue as they have.

Our Take On Nahar Spinning Mills' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 8.4% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Nahar Spinning Mills (at least 2 which can't be ignored) , and understanding them would certainly be useful.

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

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