Sutlej Textiles and Industries' (NSE:SUTLEJTEX) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Sutlej Textiles and Industries (NSE:SUTLEJTEX), we weren't too hopeful.

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. Analysts use this formula to calculate it for Sutlej Textiles and Industries:

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

0.013 = ₹200m ÷ (₹24b - ₹9.2b) (Based on the trailing twelve months to June 2023).

Thus, Sutlej Textiles and Industries has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

See 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 want to delve into the historical earnings, revenue and cash flow of Sutlej Textiles and Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Sutlej Textiles and Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.2% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Sutlej Textiles and Industries to turn into a multi-bagger.

Our Take On Sutlej Textiles and Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Sutlej Textiles and Industries, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Sutlej Textiles and Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.