How Has Archidply Industries (NSE:ARCHIDPLY) Allocated Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Archidply Industries (NSE:ARCHIDPLY), we weren't too upbeat about how things were going.

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

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

0.075 = ₹75m ÷ (₹1.8b - ₹786m) (Based on the trailing twelve months to September 2020).

Thus, Archidply Industries has an ROCE of 7.5%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

See our latest analysis for Archidply Industries

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

What Can We Tell From Archidply Industries' ROCE Trend?

We are a bit anxious about the trends of ROCE at Archidply Industries. To be more specific, today's ROCE was 13% five years ago but has since fallen to 7.5%. On top of that, the business is utilizing 22% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a separate but related note, it's important to know that Archidply Industries has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Archidply Industries' ROCE

To see Archidply Industries reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 0.07% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Archidply Industries does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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