Pashupati Cotspin (NSE:PASHUPATI) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Pashupati Cotspin (NSE:PASHUPATI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Pashupati Cotspin is:

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

0.10 = ₹173m ÷ (₹2.6b - ₹983m) (Based on the trailing twelve months to March 2021).

So, Pashupati Cotspin has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.9%.

View our latest analysis for Pashupati Cotspin

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pashupati Cotspin's ROCE against it's prior returns. If you're interested in investigating Pashupati Cotspin's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Pashupati Cotspin's ROCE Trend?

When we looked at the ROCE trend at Pashupati Cotspin, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 10%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Pashupati Cotspin's ROCE

While returns have fallen for Pashupati Cotspin in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 68% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Pashupati Cotspin we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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