Returns On Capital At Sangam (India) (NSE:SANGAMIND) Paint An Interesting 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. 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 Sangam (India) (NSE:SANGAMIND), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sangam (India) is:

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

0.033 = ₹268m ÷ (₹14b - ₹6.2b) (Based on the trailing twelve months to June 2020).

Thus, Sangam (India) has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.6%.

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'd like to look at how Sangam (India) 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 Sangam (India)'s ROCE Trend?

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 3.3% from 21% five years ago. 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.

Another thing to note, Sangam (India) has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sangam (India)'s ROCE

In summary, we're somewhat concerned by Sangam (India)'s diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 80% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for Sangam (India) (2 are a bit unpleasant) you should be aware of.

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. 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.
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