Some Investors May Be Worried About SPL Industries' (NSE:SPLIL) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at SPL Industries (NSE:SPLIL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for SPL Industries, this is the formula:

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

0.091 = ₹130m ÷ (₹1.5b - ₹86m) (Based on the trailing twelve months to March 2021).

Therefore, SPL Industries has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Luxury industry average of 10%.

See our latest analysis for SPL Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for SPL Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SPL Industries, check out these free graphs here.

The Trend Of ROCE

In terms of SPL Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.1% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, SPL Industries has done well to pay down its current liabilities to 5.7% 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 SPL Industries' ROCE

We're a bit apprehensive about SPL Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 92% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for SPL Industries you'll probably want to 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.

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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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