Investors Could Be Concerned With Peria Karamalai Tea and Produce's (NSE:PKTEA) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Peria Karamalai Tea and Produce (NSE:PKTEA), the trends above didn't look too great.

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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. Analysts use this formula to calculate it for Peria Karamalai Tea and Produce:

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

0.021 = ₹45m ÷ (₹2.4b - ₹256m) (Based on the trailing twelve months to December 2024).

Thus, Peria Karamalai Tea and Produce has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

See our latest analysis for Peria Karamalai Tea and Produce

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 Peria Karamalai Tea and Produce has performed in the past in other metrics, you can view this free graph of Peria Karamalai Tea and Produce's past earnings, revenue and cash flow.

What Can We Tell From Peria Karamalai Tea and Produce's ROCE Trend?

In terms of Peria Karamalai Tea and Produce's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Peria Karamalai Tea and Produce to turn into a multi-bagger.

Our Take On Peria Karamalai Tea and Produce's ROCE

In summary, it's unfortunate that Peria Karamalai Tea and Produce is generating lower returns from the same amount of capital. Since the stock has skyrocketed 779% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Peria Karamalai Tea and Produce (including 1 which is a bit concerning) .

While Peria Karamalai Tea and Produce 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.