Avenue Supermarts (NSE:DMART) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Avenue Supermarts (NSE:DMART) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Avenue Supermarts is:

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

0.18 = ₹36b ÷ (₹230b - ₹23b) (Based on the trailing twelve months to December 2024).

So, Avenue Supermarts has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.

Check out our latest analysis for Avenue Supermarts

Above you can see how the current ROCE for Avenue Supermarts compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Avenue Supermarts .

What Can We Tell From Avenue Supermarts' ROCE Trend?

On the surface, the trend of ROCE at Avenue Supermarts doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 18%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Avenue Supermarts' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Avenue Supermarts is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 90% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Avenue Supermarts, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Avenue Supermarts 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.