Vardhman Acrylics' (NSE:VARDHACRLC) 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Vardhman Acrylics (NSE:VARDHACRLC), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.048 = ₹179m ÷ (₹4.3b - ₹615m) (Based on the trailing twelve months to December 2020).

So, Vardhman Acrylics has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.4%.

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

What Does the ROCE Trend For Vardhman Acrylics Tell Us?

In terms of Vardhman Acrylics' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Vardhman Acrylics becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Vardhman Acrylics is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Vardhman Acrylics does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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