Returns At Ruby Mills (NSE:RUBYMILLS) Appear To Be Weighed Down

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Ruby Mills (NSE:RUBYMILLS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ruby Mills:

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

0.054 = ₹429m ÷ (₹9.6b - ₹1.7b) (Based on the trailing twelve months to March 2023).

Thus, Ruby Mills has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for Ruby Mills

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

How Are Returns Trending?

Over the past five years, Ruby Mills' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Ruby Mills to be a multi-bagger going forward.

Our Take On Ruby Mills' ROCE

In a nutshell, Ruby Mills has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 51% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 3 warning signs with Ruby Mills and understanding these should be part of your investment process.

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.