Baba Food Processing (India) (NSE:BABAFP) May Have Issues Allocating Its Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Baba Food Processing (India) (NSE:BABAFP) and its ROCE trend, we weren't exactly thrilled.

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Understanding Return On Capital Employed (ROCE)

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 Baba Food Processing (India), this is the formula:

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

0.054 = ₹56m ÷ (₹1.3b - ₹209m) (Based on the trailing twelve months to March 2025).

Therefore, Baba Food Processing (India) has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See our latest analysis for Baba Food Processing (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baba Food Processing (India)'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 Baba Food Processing (India).

What The Trend Of ROCE Can Tell Us

In terms of Baba Food Processing (India)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Baba Food Processing (India) has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line On Baba Food Processing (India)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Baba Food Processing (India). These growth trends haven't led to growth returns though, since the stock has fallen 21% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Baba Food Processing (India) does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.