The Returns On Capital At Godrej Agrovet (NSE:GODREJAGRO) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Godrej Agrovet (NSE:GODREJAGRO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Godrej Agrovet:

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

0.18 = ₹5.3b ÷ (₹56b - ₹26b) (Based on the trailing twelve months to March 2022).

Thus, Godrej Agrovet has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 13% it's much better.

See our latest analysis for Godrej Agrovet

In the above chart we have measured Godrej Agrovet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Godrej Agrovet here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Godrej Agrovet, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Godrej Agrovet has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Godrej Agrovet'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 Godrej Agrovet. In light of this, the stock has only gained 7.0% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Godrej Agrovet, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

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.