Sportking India (NSE:SPORTKING) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Sportking India (NSE:SPORTKING) 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. To calculate this metric for Sportking India, this is the formula:

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

0.12 = ₹1.6b ÷ (₹20b - ₹6.2b) (Based on the trailing twelve months to June 2024).

So, Sportking India has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Luxury industry.

Check out our latest analysis for Sportking India

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

What Does the ROCE Trend For Sportking India Tell Us?

In terms of Sportking India's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Sportking India has decreased its current liabilities to 32% 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.

What We Can Learn From Sportking India's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sportking India is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 38% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Sportking India does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Sportking India 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.