Adani Wilmar's (NSE:AWL) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Adani Wilmar (NSE:AWL) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Adani Wilmar:

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

0.10 = ₹9.5b ÷ (₹205b - ₹115b) (Based on the trailing twelve months to December 2023).

Therefore, Adani Wilmar has an ROCE of 10%. In isolation, that's a pretty standard return but against the Food industry average of 15%, it's not as good.

View our latest analysis for Adani Wilmar

Above you can see how the current ROCE for Adani Wilmar compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Adani Wilmar .

What Does the ROCE Trend For Adani Wilmar Tell Us?

On the surface, the trend of ROCE at Adani Wilmar doesn't inspire confidence. Over the last four years, returns on capital have decreased to 10% from 29% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Adani Wilmar has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Adani Wilmar's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Adani Wilmar have fallen, meanwhile the business is employing more capital than it was four years ago. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 7.2% 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.

One more thing to note, we've identified 2 warning signs with Adani Wilmar and understanding these should be part of your investment process.

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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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.