Relaxo Footwears (NSE:RELAXO) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Relaxo Footwears (NSE:RELAXO), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Relaxo Footwears is:

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

0.17 = ₹3.2b ÷ (₹24b - ₹4.6b) (Based on the trailing twelve months to June 2022).

Therefore, Relaxo Footwears has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 14% it's much better.

See our latest analysis for Relaxo Footwears

Historical performance is a great place to start when researching a stock so above you can see the gauge for Relaxo Footwears' ROCE against it's prior returns. If you'd like to look at how Relaxo Footwears has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Relaxo Footwears' ROCE Trend?

In terms of Relaxo Footwears' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 27%, but since then they've fallen to 17%. 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.

On a side note, Relaxo Footwears has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Relaxo Footwears' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Relaxo Footwears is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 302% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Relaxo Footwears could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Relaxo Footwears may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.