Some Investors May Be Worried About Shiva Texyarn's (NSE:SHIVATEX) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Shiva Texyarn (NSE:SHIVATEX), the trends above didn't look too great.

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 Shiva Texyarn is:

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

0.093 = ₹210m ÷ (₹3.3b - ₹1.0b) (Based on the trailing twelve months to September 2022).

So, Shiva Texyarn has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

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'd like to look at how Shiva Texyarn has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shiva Texyarn Tell Us?

The trend of returns that Shiva Texyarn is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 9.3% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Shiva Texyarn has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shiva Texyarn's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. We expect this has contributed to the stock plummeting 79% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shiva Texyarn does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is concerning...

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. 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.