Some Investors May Be Worried About Grob Tea's (NSE:GROBTEA) Returns On Capital

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. 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 Grob Tea (NSE:GROBTEA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 Grob Tea:

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

0.028 = ₹26m ÷ (₹1.1b - ₹212m) (Based on the trailing twelve months to December 2021).

Thus, Grob Tea has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

Check out our latest analysis for Grob Tea

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grob Tea's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Grob Tea, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Grob Tea doesn't inspire confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 2.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Grob Tea has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Grob Tea's ROCE

To conclude, we've found that Grob Tea is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 168% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 3 warning signs with Grob Tea and understanding them should be part of your investment process.

While Grob Tea 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.