The Return Trends At Archidply Industries (NSE:ARCHIDPLY) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Archidply Industries (NSE:ARCHIDPLY) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Archidply Industries is:

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

0.14 = ₹137m ÷ (₹1.8b - ₹899m) (Based on the trailing twelve months to September 2021).

So, Archidply Industries has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Forestry industry.

View our latest analysis for Archidply Industries

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 Archidply Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Archidply Industries. We found that the returns on capital employed over the last five years have risen by 30%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Archidply Industries appears to been achieving more with less, since the business is using 27% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a separate but related note, it's important to know that Archidply Industries has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

From what we've seen above, Archidply Industries has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Archidply Industries does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Archidply 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.

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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.