Emmbi Industries' (NSE:EMMBI) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Emmbi Industries (NSE:EMMBI), we don't think it's current trends fit the mold of a multi-bagger.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. To calculate this metric for Emmbi Industries, this is the formula:

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

0.099 = ₹231m ÷ (₹4.0b - ₹1.6b) (Based on the trailing twelve months to December 2024).

Therefore, Emmbi Industries has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Packaging industry average of 11%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Emmbi Industries.

The Trend Of ROCE

We weren't thrilled with the trend because Emmbi Industries' ROCE has reduced by 41% over the last five years, while the business employed 31% more capital. Usually this isn't ideal, but given Emmbi Industries conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Emmbi Industries' earnings and if they change as a result from the capital raise.

Another thing to note, Emmbi Industries has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Emmbi Industries' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 120% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Emmbi Industries, we've spotted 4 warning signs, and 3 of them are potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.