Stock Analysis

K.M. Sugar Mills (NSE:KMSUGAR) Will Be Hoping To Turn Its Returns On Capital Around

NSEI:KMSUGAR
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating K.M. Sugar Mills (NSE:KMSUGAR), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 K.M. Sugar Mills:

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

0.17 = ₹461m ÷ (₹6.2b - ₹3.5b) (Based on the trailing twelve months to June 2021).

Thus, K.M. Sugar Mills has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

See our latest analysis for K.M. Sugar Mills

roce
NSEI:KMSUGAR Return on Capital Employed November 11th 2021

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

What Does the ROCE Trend For K.M. Sugar Mills Tell Us?

When we looked at the ROCE trend at K.M. Sugar Mills, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, K.M. Sugar Mills has decreased its current liabilities to 57% 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. Keep in mind 57% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On K.M. Sugar Mills' ROCE

We're a bit apprehensive about K.M. Sugar Mills because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 33% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with K.M. Sugar Mills (including 1 which is a bit concerning) .

While K.M. Sugar 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.

Valuation is complex, but we're here to simplify it.

Discover if K.M. Sugar Mills might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

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