Ambica Agarbathies Aroma & Industries' (NSE:AMBICAAGAR) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Ambica Agarbathies Aroma & Industries (NSE:AMBICAAGAR), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Ambica Agarbathies Aroma & Industries, this is the formula:

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

0.011 = ₹21m ÷ (₹2.1b - ₹243m) (Based on the trailing twelve months to March 2024).

So, Ambica Agarbathies Aroma & Industries has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

View our latest analysis for Ambica Agarbathies Aroma & Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ambica Agarbathies Aroma & Industries' ROCE against it's prior returns. If you'd like to look at how Ambica Agarbathies Aroma & Industries has performed in the past in other metrics, you can view this free graph of Ambica Agarbathies Aroma & Industries' past earnings, revenue and cash flow.

What Does the ROCE Trend For Ambica Agarbathies Aroma & Industries Tell Us?

In terms of Ambica Agarbathies Aroma & Industries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ambica Agarbathies Aroma & Industries to turn into a multi-bagger.

Our Take On Ambica Agarbathies Aroma & Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 49% return over the last three years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Ambica Agarbathies Aroma & Industries does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.