Returns On Capital At Pashupati Cotspin (NSE:PASHUPATI) Paint A Concerning Picture

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Pashupati Cotspin (NSE:PASHUPATI), it didn't seem to tick all of these boxes.

Understanding 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 Pashupati Cotspin:

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

0.063 = ₹84m ÷ (₹2.4b - ₹1.1b) (Based on the trailing twelve months to March 2020).

Therefore, Pashupati Cotspin has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.4%.

View our latest analysis for Pashupati Cotspin

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 want to delve into the historical earnings, revenue and cash flow of Pashupati Cotspin, check out these free graphs here.

How Are Returns Trending?

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 13%, but since then they've fallen to 6.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Pashupati Cotspin's current liabilities have increased over the last five years to 45% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Pashupati Cotspin's ROCE

In summary, we're somewhat concerned by Pashupati Cotspin's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 19% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Pashupati Cotspin does come with some risks though, we found 9 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

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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