Returns On Capital Signal Tricky Times Ahead For Annapurna Swadisht (NSE:ANNAPURNA)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Annapurna Swadisht (NSE:ANNAPURNA), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Annapurna Swadisht is:

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

0.18 = ₹233m ÷ (₹2.4b - ₹1.1b) (Based on the trailing twelve months to March 2024).

Therefore, Annapurna Swadisht has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.

View our latest analysis for Annapurna Swadisht

Historical performance is a great place to start when researching a stock so above you can see the gauge for Annapurna Swadisht's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Annapurna Swadisht.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 27% four years ago, while the business's capital employed increased by 6,030%. That being said, Annapurna Swadisht raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Annapurna Swadisht might not have received a full period of earnings contribution from it.

On a side note, Annapurna Swadisht's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Annapurna Swadisht's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Annapurna Swadisht is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 34% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with Annapurna Swadisht (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Annapurna Swadisht 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com