There Are Reasons To Feel Uneasy About Radico Khaitan's (NSE:RADICO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Radico Khaitan (NSE:RADICO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Radico Khaitan:

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

0.14 = ₹4.1b ÷ (₹41b - ₹12b) (Based on the trailing twelve months to June 2024).

Therefore, Radico Khaitan has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 15%.

View our latest analysis for Radico Khaitan

Above you can see how the current ROCE for Radico Khaitan compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Radico Khaitan .

So How Is Radico Khaitan's ROCE Trending?

On the surface, the trend of ROCE at Radico Khaitan doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Radico Khaitan in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 587% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Radico Khaitan it's worth checking out our FREE intrinsic value approximation for RADICO to see if it's trading at an attractive price in other respects.

While Radico Khaitan 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.