The Returns On Capital At Aarti Industries (NSE:AARTIIND) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Aarti Industries (NSE:AARTIIND), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Aarti Industries:

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

0.14 = ₹9.1b ÷ (₹87b - ₹21b) (Based on the trailing twelve months to September 2021).

Thus, Aarti Industries has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 17%.

View our latest analysis for Aarti Industries

Above you can see how the current ROCE for Aarti Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Aarti Industries' ROCE Trend?

When we looked at the ROCE trend at Aarti Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Aarti Industries has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Aarti Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Aarti Industries is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 446% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Aarti Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While Aarti Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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