Be Wary Of Avenue Supermarts (NSE:DMART) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Avenue Supermarts (NSE:DMART) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Avenue Supermarts, this is the formula:

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

0.18 = ₹34b ÷ (₹212b - ₹20b) (Based on the trailing twelve months to March 2024).

Therefore, Avenue Supermarts has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 5.1% it's much better.

View our latest analysis for Avenue Supermarts

In the above chart we have measured Avenue Supermarts' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Avenue Supermarts .

The Trend Of ROCE

When we looked at the ROCE trend at Avenue Supermarts, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 18%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Avenue Supermarts. And the stock has done incredibly well with a 267% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Avenue Supermarts does have some risks though, and we've spotted 1 warning sign for Avenue Supermarts that you might be interested in.

While Avenue Supermarts 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.