Returns On Capital At Sutlej Textiles and Industries (NSE:SUTLEJTEX) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Sutlej Textiles and Industries (NSE:SUTLEJTEX) 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)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sutlej Textiles and Industries is:

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

0.068 = ₹997m ÷ (₹21b - ₹6.7b) (Based on the trailing twelve months to June 2021).

Thus, Sutlej Textiles and Industries has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

View our latest analysis for Sutlej Textiles and Industries

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

How Are Returns Trending?

In terms of Sutlej Textiles and Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Sutlej Textiles and Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sutlej Textiles and Industries. In light of this, the stock has only gained 2.9% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Sutlej Textiles and Industries we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Sutlej Textiles and Industries 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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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.
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