There Are Reasons To Feel Uneasy About Cupid's (NSE:CUPID) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Cupid (NSE:CUPID) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

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 Cupid:

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

0.17 = ₹552m ÷ (₹3.6b - ₹302m) (Based on the trailing twelve months to December 2024).

Thus, Cupid has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 18%.

See our latest analysis for Cupid

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

What Can We Tell From Cupid's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 47% five years ago, while capital employed has grown 238%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Cupid might not have received a full period of earnings contribution from it.

On a related note, Cupid has decreased its current liabilities to 8.4% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Cupid is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 1,120% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

While Cupid 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.

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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.