Returns On Capital Signal Tricky Times Ahead For Ponni Sugars (Erode) (NSE:PONNIERODE)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ponni Sugars (Erode) (NSE:PONNIERODE), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Ponni Sugars (Erode), this is the formula:

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

0.024 = ₹149m ÷ (₹6.5b - ₹320m) (Based on the trailing twelve months to December 2024).

So, Ponni Sugars (Erode) has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

See our latest analysis for Ponni Sugars (Erode)

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 Ponni Sugars (Erode) has performed in the past in other metrics, you can view this free graph of Ponni Sugars (Erode)'s past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Ponni Sugars (Erode), we didn't gain much confidence. Around five years ago the returns on capital were 9.6%, but since then they've fallen to 2.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Ponni Sugars (Erode) has decreased its current liabilities to 4.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Ponni Sugars (Erode)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Ponni Sugars (Erode) have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 146% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Ponni Sugars (Erode) 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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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.