Here's What's Concerning About Sakuma Exports' (NSE:SAKUMA) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sakuma Exports (NSE:SAKUMA) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Sakuma Exports is:

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

0.037 = ₹137m ÷ (₹4.3b - ₹544m) (Based on the trailing twelve months to March 2021).

Therefore, Sakuma Exports has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.9%.

View our latest analysis for Sakuma Exports

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sakuma Exports' ROCE against it's prior returns. If you'd like to look at how Sakuma Exports has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sakuma Exports Tell Us?

We weren't thrilled with the trend because Sakuma Exports' ROCE has reduced by 87% over the last five years, while the business employed 174% more capital. That being said, Sakuma Exports raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sakuma Exports probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Sakuma Exports has decreased its current liabilities to 13% of total assets. Considering it used to be 82%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Sakuma Exports have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 86% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Sakuma Exports (of which 2 make us uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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