The Returns On Capital At IFB Agro Industries (NSE:IFBAGRO) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at IFB Agro Industries (NSE:IFBAGRO), 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. To calculate this metric for IFB Agro Industries, this is the formula:

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

0.055 = ₹224m ÷ (₹4.7b - ₹573m) (Based on the trailing twelve months to December 2020).

Thus, IFB Agro Industries has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 14%.

Check out our latest analysis for IFB Agro Industries

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

The Trend Of ROCE

In terms of IFB Agro Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 13% five years ago. 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for IFB Agro Industries have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 1.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing IFB Agro Industries we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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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