Here's What To Make Of Vardhman Acrylics' (NSE:VARDHACRLC) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Vardhman Acrylics (NSE:VARDHACRLC) 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?

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. To calculate this metric for Vardhman Acrylics, this is the formula:

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

0.10 = ₹423m ÷ (₹4.9b - ₹758m) (Based on the trailing twelve months to March 2021).

So, Vardhman Acrylics has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.9%.

Check out our latest analysis for Vardhman Acrylics

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're interested in investigating Vardhman Acrylics' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Vardhman Acrylics' ROCE Trend?

Things have been pretty stable at Vardhman Acrylics, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Vardhman Acrylics in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Vardhman Acrylics' ROCE

In summary, Vardhman Acrylics isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Vardhman Acrylics does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Vardhman Acrylics 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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