Should We Be Excited About The Trends Of Returns At Umang Dairies (NSE:UMANGDAIRY)?

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 investigating Umang Dairies (NSE:UMANGDAIRY), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Umang Dairies is:

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

0.14 = ₹129m ÷ (₹1.3b - ₹405m) (Based on the trailing twelve months to December 2020).

Therefore, Umang Dairies has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

View our latest analysis for Umang Dairies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Umang Dairies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Umang Dairies, check out these free graphs here.

How Are Returns Trending?

In terms of Umang Dairies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On Umang Dairies' ROCE

Bringing it all together, while we're somewhat encouraged by Umang Dairies' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 10.0% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Umang Dairies, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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