Sakuma Exports (NSE:SAKUMA) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Sakuma Exports (NSE:SAKUMA), it didn't seem to tick all of these boxes.

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. To calculate this metric for Sakuma Exports, this is the formula:

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

0.036 = ₹135m ÷ (₹4.3b - ₹544m) (Based on the trailing twelve months to June 2021).

Therefore, Sakuma Exports has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

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

So How Is Sakuma Exports' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 30% five years ago, while capital employed has grown 174%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Sakuma Exports might not have received a full period of earnings contribution from it.

On a side note, Sakuma Exports has done well to pay down 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Sakuma Exports' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 87% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Sakuma Exports, we've spotted 4 warning signs, and 1 of them is significant.

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.

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.

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