Is SKM Egg Products Export (India) (NSE:SKMEGGPROD) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at SKM Egg Products Export (India) (NSE:SKMEGGPROD), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for SKM Egg Products Export (India), this is the formula:

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

0.13 = ₹154m ÷ (₹2.0b - ₹881m) (Based on the trailing twelve months to September 2020).

Therefore, SKM Egg Products Export (India) has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Food industry.

Check out our latest analysis for SKM Egg Products Export (India)

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 want to delve into the historical earnings, revenue and cash flow of SKM Egg Products Export (India), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at SKM Egg Products Export (India) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 35% five years ago. However it looks like SKM Egg Products Export (India) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, SKM Egg Products Export (India) has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, SKM Egg Products Export (India) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 60% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing SKM Egg Products Export (India) we've found 5 warning signs (1 is concerning!) that you should be aware of before investing here.

While SKM Egg Products Export (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading SKM Egg Products Export (India) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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