These Return Metrics Don't Make Nandan Denim (NSE:NDL) Look Too Strong

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Nandan Denim (NSE:NDL), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

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 Nandan Denim is:

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

0.072 = ₹532m ÷ (₹12b - ₹4.5b) (Based on the trailing twelve months to June 2021).

Thus, Nandan Denim has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

Check out our latest analysis for Nandan Denim

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

So How Is Nandan Denim's ROCE Trending?

There is reason to be cautious about Nandan Denim, given the returns are trending downwards. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nandan Denim becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Nandan Denim is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Nandan Denim (2 are a bit concerning) you should be aware of.

While Nandan Denim 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.

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