Returns On Capital At Nath Bio-Genes (India) (NSE:NATHBIOGEN) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after investigating Nath Bio-Genes (India) (NSE:NATHBIOGEN), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Nath Bio-Genes (India), this is the formula:

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

0.08 = ₹486m ÷ (₹8.5b - ₹2.4b) (Based on the trailing twelve months to September 2023).

So, Nath Bio-Genes (India) has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

View our latest analysis for Nath Bio-Genes (India)

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

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Nath Bio-Genes (India). The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 8.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 28% of total assets, this reported ROCE would probably be less than8.0% because total capital employed would be higher.The 8.0% ROCE could be even lower if current liabilities weren't 28% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line

Long story short, while Nath Bio-Genes (India) has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Nath Bio-Genes (India) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Nath Bio-Genes (India) 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.