Returns On Capital Signal Tricky Times Ahead For Nath Bio-Genes (India) (NSE:NATHBIOGEN)

By
Simply Wall St
Published
May 27, 2021
NSEI:NATHBIOGEN
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Nath Bio-Genes (India) (NSE:NATHBIOGEN), we don't think it's current trends fit the mold of a multi-bagger.

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 Nath Bio-Genes (India):

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

0.099 = ₹601m ÷ (₹7.1b - ₹1.1b) (Based on the trailing twelve months to December 2020).

Thus, Nath Bio-Genes (India) has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Food industry average of 12%.

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

roce
NSEI:NATHBIOGEN Return on Capital Employed May 28th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nath Bio-Genes (India)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Nath Bio-Genes (India) Tell Us?

On the surface, the trend of ROCE at Nath Bio-Genes (India) doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Nath Bio-Genes (India) has done well to pay down its current liabilities to 15% 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nath Bio-Genes (India). And long term investors must be optimistic going forward because the stock has returned a huge 367% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 1 warning sign for Nath Bio-Genes (India) you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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