Vardhman Acrylics (NSE:VARDHACRLC) Could Be At Risk Of Shrinking As A Company

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 we looked into Vardhman Acrylics (NSE:VARDHACRLC), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Vardhman Acrylics.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Vardhman Acrylics is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.1% we see today. In addition to that, Vardhman Acrylics is now employing 32% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

In summary, it's unfortunate that Vardhman Acrylics is shrinking its capital base and also generating lower returns. Since the stock has skyrocketed 112% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Vardhman Acrylics, we've spotted 4 warning signs, and 2 of them can't be ignored.

While Vardhman Acrylics 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.