Returns On Capital Signal Tricky Times Ahead For Cool Caps Industries (NSE:COOLCAPS)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Cool Caps Industries (NSE:COOLCAPS) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cool Caps Industries is:

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

0.13 = ₹166m ÷ (₹2.2b - ₹945m) (Based on the trailing twelve months to September 2024).

So, Cool Caps Industries has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Packaging industry.

See our latest analysis for Cool Caps Industries

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

So How Is Cool Caps Industries' ROCE Trending?

In terms of Cool Caps Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Cool Caps Industries have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 87% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Cool Caps Industries (including 2 which don't sit too well with us) .

While Cool Caps 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.