Investors Could Be Concerned With SVP Global Textiles' (NSE:SVPGLOB) Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at SVP Global Textiles (NSE:SVPGLOB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on SVP Global Textiles is:

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

0.02 = ₹529m ÷ (₹39b - ₹12b) (Based on the trailing twelve months to December 2022).

Thus, SVP Global Textiles has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

View our latest analysis for SVP Global Textiles

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of SVP Global Textiles, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at SVP Global Textiles, we didn't gain much confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 2.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On SVP Global Textiles' ROCE

We're a bit apprehensive about SVP Global Textiles because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 71% over the last year, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

SVP Global Textiles does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those don't sit too well with us...

While SVP Global Textiles 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.