Shalby (NSE:SHALBY) Will Will Want To Turn Around Its Return Trends

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shalby (NSE:SHALBY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Shalby, this is the formula:

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

0.064 = ₹587m ÷ (₹10.0b - ₹817m) (Based on the trailing twelve months to March 2021).

So, Shalby has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

Check out our latest analysis for Shalby

Above you can see how the current ROCE for Shalby compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shalby here for free.

What The Trend Of ROCE Can Tell Us

In terms of Shalby's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Shalby 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Shalby is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Shalby, we've discovered 1 warning sign that you should be aware of.

While Shalby 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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