The Trends At Nath Bio-Genes (India) (NSE:NATHBIOGEN) That You Should Know About

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nath Bio-Genes (India) (NSE:NATHBIOGEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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 = ₹597m ÷ (₹7.1b - ₹1.1b) (Based on the trailing twelve months to September 2020).

So, Nath Bio-Genes (India) has an ROCE of 9.9%. On its own, that's a low figure but it's around the 12% average generated by the Food industry.

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

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'd like to look at how Nath Bio-Genes (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nath Bio-Genes (India)'s ROCE Trend?

In terms of Nath Bio-Genes (India)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.9% from 14% five years ago. 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 related note, Nath Bio-Genes (India) has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Nath Bio-Genes (India) is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 354% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

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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