Investors Could Be Concerned With Pasupati Acrylon's (NSE:PASUPTAC) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Pasupati Acrylon (NSE:PASUPTAC), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Pasupati Acrylon is:

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

0.064 = ₹246m ÷ (₹5.0b - ₹1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Pasupati Acrylon has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.

View our latest analysis for Pasupati Acrylon

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

What Can We Tell From Pasupati Acrylon's ROCE Trend?

On the surface, the trend of ROCE at Pasupati Acrylon doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 6.4%. 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, Pasupati Acrylon has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Pasupati Acrylon's ROCE

We're a bit apprehensive about Pasupati Acrylon because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 41% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Pasupati Acrylon does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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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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.