The Returns On Capital At Aspinwall (NSE:ASPINWALL) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Aspinwall (NSE:ASPINWALL), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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 Aspinwall is:

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

0.034 = ₹48m ÷ (₹2.4b - ₹944m) (Based on the trailing twelve months to December 2020).

So, Aspinwall has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

View our latest analysis for Aspinwall

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Aspinwall, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Aspinwall to turn into a multi-bagger.

Our Take On Aspinwall's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 42% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 5 warning signs for Aspinwall (1 can't be ignored) you should be aware of.

While Aspinwall 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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