Capital Allocation Trends At Sangam (India) (NSE:SANGAMIND) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sangam (India) (NSE:SANGAMIND), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Sangam (India) is:

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

0.08 = ₹1.4b ÷ (₹28b - ₹9.9b) (Based on the trailing twelve months to December 2024).

Thus, Sangam (India) has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for Sangam (India)

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

What Does the ROCE Trend For Sangam (India) Tell Us?

When we looked at the ROCE trend at Sangam (India), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 10.0% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Sangam (India)'s ROCE

To conclude, we've found that Sangam (India) is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 941% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Sangam (India) we've found 4 warning signs (1 is 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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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.