Will Akzo Nobel India (NSE:AKZOINDIA) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Akzo Nobel India (NSE:AKZOINDIA) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Akzo Nobel India, this is the formula:

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

0.16 = ₹2.2b ÷ (₹22b - ₹8.3b) (Based on the trailing twelve months to September 2020).

Thus, Akzo Nobel India has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

Check out our latest analysis for Akzo Nobel India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Akzo Nobel India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Akzo Nobel India's ROCE Trending?

When we looked at the ROCE trend at Akzo Nobel India, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Akzo Nobel India's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Akzo Nobel India have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 78% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Akzo Nobel India you'll probably want to know about.

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