Parag Milk Foods (NSE:PARAGMILK) Is Reinvesting At Lower Rates Of Return

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Parag Milk Foods (NSE:PARAGMILK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Parag Milk Foods:

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

0.13 = ₹1.4b ÷ (₹17b - ₹5.9b) (Based on the trailing twelve months to June 2023).

So, Parag Milk Foods has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

View our latest analysis for Parag Milk Foods

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

What Can We Tell From Parag Milk Foods' ROCE Trend?

We weren't thrilled with the trend because Parag Milk Foods' ROCE has reduced by 42% over the last five years, while the business employed 37% more capital. That being said, Parag Milk Foods raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Parag Milk Foods probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Parag Milk Foods. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Parag Milk Foods (of which 1 is a bit unpleasant!) that you should know about.

While Parag Milk Foods isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.