Century Textiles and Industries (NSE:CENTURYTEX) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Century Textiles and Industries (NSE:CENTURYTEX), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Century Textiles and Industries:

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

0.057 = ₹2.9b ÷ (₹85b - ₹34b) (Based on the trailing twelve months to June 2023).

Therefore, Century Textiles and Industries has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 15%.

See our latest analysis for Century Textiles and Industries

Above you can see how the current ROCE for Century Textiles and Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Century Textiles and Industries.

So How Is Century Textiles and Industries' ROCE Trending?

In terms of Century Textiles and Industries' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Century Textiles and Industries becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Century Textiles and Industries is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 25% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Century Textiles and Industries, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Century Textiles and Industries 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.