Returns On Capital Signal Difficult Times Ahead For Vardhman Acrylics (NSE:VARDHACRLC)

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Vardhman Acrylics (NSE:VARDHACRLC), so let's see why.

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Understanding 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. Analysts use this formula to calculate it for Vardhman Acrylics:

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

0.021 = ₹51m ÷ (₹3.1b - ₹666m) (Based on the trailing twelve months to December 2024).

Thus, Vardhman Acrylics has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.7%.

View 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'd like to look at how Vardhman Acrylics has performed in the past in other metrics, you can view this free graph of Vardhman Acrylics' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Vardhman Acrylics' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 7.9% five years ago but has since fallen to 2.1%. On top of that, the business is utilizing 32% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Vardhman Acrylics' ROCE

In summary, it's unfortunate that Vardhman Acrylics is shrinking its capital base and also generating lower returns. Since the stock has skyrocketed 165% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Vardhman Acrylics, we've spotted 4 warning signs, and 2 of them are significant.

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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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.