Sangam (India) (NSE:SANGAMIND) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Sangam (India) (NSE:SANGAMIND), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Sangam (India):

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

0.13 = ₹1.1b ÷ (₹14b - ₹6.0b) (Based on the trailing twelve months to June 2021).

Therefore, Sangam (India) has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Luxury industry.

Check out 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?

There is reason to be cautious about Sangam (India), given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Sangam (India) to turn into a multi-bagger.

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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Sangam (India)'s ROCE

In summary, it's unfortunate that Sangam (India) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Sangam (India) we've found 5 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Sangam (India) 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.

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.

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