Nitin Spinners (NSE:NITINSPIN) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Nitin Spinners (NSE:NITINSPIN) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Nitin Spinners, this is the formula:

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

0.10 = ₹1.8b ÷ (₹22b - ₹5.3b) (Based on the trailing twelve months to June 2023).

Thus, Nitin Spinners has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

Check out our latest analysis for Nitin Spinners

In the above chart we have measured Nitin Spinners' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nitin Spinners.

How Are Returns Trending?

On the surface, the trend of ROCE at Nitin Spinners doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 10%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Nitin Spinners have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 220% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Nitin Spinners does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

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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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.