AVT Natural Products' (NSE:AVTNPL) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at AVT Natural Products (NSE:AVTNPL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. Analysts use this formula to calculate it for AVT Natural Products:

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

0.098 = ₹480m ÷ (₹7.2b - ₹2.3b) (Based on the trailing twelve months to December 2024).

Thus, AVT Natural Products has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

See our latest analysis for AVT Natural Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for AVT Natural Products' ROCE against it's prior returns. If you're interested in investigating AVT Natural Products' past further, check out this free graph covering AVT Natural Products' past earnings, revenue and cash flow .

How Are Returns Trending?

On the surface, the trend of ROCE at AVT Natural Products doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 18% five years ago. However it looks like AVT Natural Products might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On AVT Natural Products' ROCE

To conclude, we've found that AVT Natural Products is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 111% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing AVT Natural Products that you might find interesting.

While AVT Natural Products 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.