Here's What's Concerning About Parag Milk Foods' (NSE:PARAGMILK) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Parag Milk Foods (NSE:PARAGMILK) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Parag Milk Foods is:

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

0.10 = ₹1.2b ÷ (₹17b - ₹6.2b) (Based on the trailing twelve months to September 2023).

Thus, Parag Milk Foods has an ROCE of 10%. In isolation, that's a pretty standard return but against the Food industry average of 14%, it's not as good.

View our latest analysis for Parag Milk Foods

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 Parag Milk Foods 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 Parag Milk Foods' ROCE Trend?

On the surface, the trend of ROCE at Parag Milk Foods doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 22% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Parag Milk Foods' ROCE

While returns have fallen for Parag Milk Foods in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 17% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know about the risks facing Parag Milk Foods, we've discovered 1 warning sign that you should be aware of.

While Parag Milk Foods 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.