Arrow Greentech (NSE:ARROWGREEN) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Arrow Greentech (NSE:ARROWGREEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Arrow Greentech:

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

0.041 = ₹37m ÷ (₹990m - ₹81m) (Based on the trailing twelve months to March 2021).

Therefore, Arrow Greentech has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.

View our latest analysis for Arrow Greentech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arrow Greentech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Arrow Greentech, check out these free graphs here.

How Are Returns Trending?

In terms of Arrow Greentech's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 52%, but since then they've fallen to 4.1%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Arrow Greentech in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 71% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

Arrow Greentech does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Arrow Greentech 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.
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