Returns On Capital At Arrow Greentech (NSE:ARROWGREEN) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Arrow Greentech (NSE:ARROWGREEN), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.078 = ₹69m ÷ (₹977m - ₹84m) (Based on the trailing twelve months to September 2021).

So, Arrow Greentech has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Packaging industry average of 14%.

View our latest analysis for Arrow Greentech

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

So How Is Arrow Greentech's ROCE Trending?

There is reason to be cautious about Arrow Greentech, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 41% that they were earning five years ago. 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 Arrow Greentech to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Arrow Greentech is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 70% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Arrow Greentech does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Arrow Greentech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.