There Are Reasons To Feel Uneasy About Ponni Sugars (Erode)'s (NSE:PONNIERODE) Returns On Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ponni Sugars (Erode) (NSE:PONNIERODE) 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. 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)

0.062 = ₹236m ÷ (₹4.2b - ₹403m) (Based on the trailing twelve months to June 2022).

Thus, Ponni Sugars (Erode) has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 14%.

See our latest analysis for Ponni Sugars (Erode)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ponni Sugars (Erode)'s ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Ponni Sugars (Erode) doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ponni Sugars (Erode). And the stock has followed suit returning a meaningful 58% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Ponni Sugars (Erode) does have some risks though, and we've spotted 2 warning signs for Ponni Sugars (Erode) that you might be interested in.

While Ponni Sugars (Erode) 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.