What Vardhman Acrylics' (NSE:VARDHACRLC) Returns On Capital Can Tell Us

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Vardhman Acrylics (NSE:VARDHACRLC), so let's see why.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Vardhman Acrylics is:

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

0.0038 = ₹14m ÷ (₹4.3b - ₹615m) (Based on the trailing twelve months to September 2020).

Therefore, Vardhman Acrylics has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.3%.

See our latest analysis for Vardhman Acrylics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vardhman Acrylics' ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

So How Is Vardhman Acrylics' ROCE Trending?

There is reason to be cautious about Vardhman Acrylics, given the returns are trending downwards. About five years ago, returns on capital were 7.3%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Vardhman Acrylics to turn into a multi-bagger.

Our Take On Vardhman Acrylics' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 6.1% 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 have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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