Investors Could Be Concerned With Balrampur Chini Mills' (NSE:BALRAMCHIN) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Balrampur Chini Mills (NSE:BALRAMCHIN), it didn't seem to tick all of these boxes.

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 Balrampur Chini Mills:

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

0.18 = ₹5.2b ÷ (₹31b - ₹2.9b) (Based on the trailing twelve months to September 2021).

So, Balrampur Chini Mills has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

View our latest analysis for Balrampur Chini Mills

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

What Does the ROCE Trend For Balrampur Chini Mills Tell Us?

When we looked at the ROCE trend at Balrampur Chini Mills, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 18%. And considering revenue has dropped while employing more capital, we'd be cautious. 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 side note, Balrampur Chini Mills has done well to pay down its current liabilities to 9.2% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by Balrampur Chini Mills' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 238% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Balrampur Chini Mills (1 is concerning) you should be aware of.

While Balrampur Chini Mills isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.