Returns On Capital At Shiva Texyarn (NSE:SHIVATEX) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Shiva Texyarn (NSE:SHIVATEX) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shiva Texyarn:

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

0.092 = ₹186m ÷ (₹3.5b - ₹1.5b) (Based on the trailing twelve months to June 2020).

So, Shiva Texyarn has an ROCE of 9.2%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.

View our latest analysis for Shiva Texyarn

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

What Can We Tell From Shiva Texyarn's ROCE Trend?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 30% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 9.2%, it's hard to get excited about these developments.

On a separate but related note, it's important to know that Shiva Texyarn has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Shiva Texyarn's ROCE

Overall, we're not ecstatic to see Shiva Texyarn reducing the amount of capital it employs in the business. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Shiva Texyarn (including 2 which is don't sit too well with us) .

While Shiva Texyarn 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.

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