Investors Met With Slowing Returns on Capital At Sarla Performance Fibers (NSE:SARLAPOLY)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Sarla Performance Fibers (NSE:SARLAPOLY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sarla Performance Fibers is:

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

0.12 = ₹471m ÷ (₹5.9b - ₹1.8b) (Based on the trailing twelve months to June 2021).

Therefore, Sarla Performance Fibers has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

Check out our latest analysis for Sarla Performance Fibers

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

What Can We Tell From Sarla Performance Fibers' ROCE Trend?

There hasn't been much to report for Sarla Performance Fibers' returns and its level of capital employed because both metrics have been steady for the past five years. 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. So unless we see a substantial change at Sarla Performance Fibers in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Sarla Performance Fibers' ROCE

We can conclude that in regards to Sarla Performance Fibers' returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Sarla Performance Fibers does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

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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