Sarla Performance Fibers (NSE:SARLAPOLY) Could Be Struggling To Allocate Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Sarla Performance Fibers (NSE:SARLAPOLY), so let's see why.

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. Analysts use this formula to calculate it for Sarla Performance Fibers:

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

0.042 = ₹168m ÷ (₹5.3b - ₹1.3b) (Based on the trailing twelve months to December 2020).

Therefore, Sarla Performance Fibers has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.5%.

View 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 want to delve into the historical earnings, revenue and cash flow of Sarla Performance Fibers, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Sarla Performance Fibers, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sarla Performance Fibers becoming one if things continue as they have.

What We Can Learn From Sarla Performance Fibers' ROCE

In summary, it's unfortunate that Sarla Performance Fibers is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 59% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Sarla Performance Fibers (1 makes us a bit uncomfortable) you should be aware of.

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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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