Suryalakshmi Cotton Mills (NSE:SURYALAXMI) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Suryalakshmi Cotton Mills (NSE:SURYALAXMI) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Suryalakshmi Cotton Mills:

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

0.12 = ₹497m ÷ (₹6.9b - ₹2.8b) (Based on the trailing twelve months to September 2021).

So, Suryalakshmi Cotton Mills has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 13%.

See our latest analysis for Suryalakshmi Cotton Mills

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suryalakshmi Cotton Mills' ROCE against it's prior returns. If you'd like to look at how Suryalakshmi Cotton Mills has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Suryalakshmi Cotton Mills' ROCE Trending?

We are a bit anxious about the trends of ROCE at Suryalakshmi Cotton Mills. To be more specific, today's ROCE was 16% five years ago but has since fallen to 12%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 27% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Suryalakshmi Cotton Mills' current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Suryalakshmi Cotton Mills is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 48% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Suryalakshmi Cotton Mills (including 2 which make us uncomfortable) .

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.