Capital Allocation Trends At Emmbi Industries (NSE:EMMBI) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Emmbi Industries (NSE:EMMBI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Emmbi Industries:

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

0.09 = ₹209m ÷ (₹3.8b - ₹1.5b) (Based on the trailing twelve months to December 2023).

So, Emmbi Industries has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 13%.

Check out our latest analysis for Emmbi 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're interested in investigating Emmbi Industries' past further, check out this free graph covering Emmbi Industries' past earnings, revenue and cash flow.

So How Is Emmbi Industries' ROCE Trending?

On the surface, the trend of ROCE at Emmbi Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Emmbi Industries' ROCE

In summary, Emmbi Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think Emmbi Industries has the makings of a multi-bagger.

On a final note, we found 6 warning signs for Emmbi Industries (2 make us uncomfortable) you should be aware of.

While Emmbi 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.