Some Investors May Be Worried About Vishwaraj Sugar Industries' (NSE:VISHWARAJ) 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Vishwaraj Sugar Industries (NSE:VISHWARAJ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 5 warning signs about Vishwaraj Sugar Industries. View them for free.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Vishwaraj Sugar Industries is:

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

0.017 = ₹85m ÷ (₹8.4b - ₹3.4b) (Based on the trailing twelve months to December 2024).

Thus, Vishwaraj Sugar Industries has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

Check out our latest analysis for Vishwaraj Sugar Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vishwaraj Sugar Industries' ROCE against it's prior returns. If you're interested in investigating Vishwaraj Sugar Industries' past further, check out this free graph covering Vishwaraj Sugar Industries' past earnings, revenue and cash flow.

What Can We Tell From Vishwaraj Sugar Industries' ROCE Trend?

We weren't thrilled with the trend because Vishwaraj Sugar Industries' ROCE has reduced by 75% over the last five years, while the business employed 62% more capital. Usually this isn't ideal, but given Vishwaraj Sugar Industries conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Vishwaraj Sugar Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Vishwaraj Sugar Industries has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

We're a bit apprehensive about Vishwaraj Sugar Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 19% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Vishwaraj Sugar Industries we've found 5 warning signs (3 shouldn't be ignored!) that you should be aware of before investing here.

While Vishwaraj Sugar Industries 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.