Incredible Industries (NSE:INCREDIBLE) May Have Issues Allocating Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Incredible Industries (NSE:INCREDIBLE), we weren't too hopeful.

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. The formula for this calculation on Incredible Industries is:

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

0.038 = ₹51m ÷ (₹1.8b - ₹434m) (Based on the trailing twelve months to December 2020).

So, Incredible Industries has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.

See our latest analysis for Incredible 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, revenue and cash flow of Incredible Industries, check out these free graphs here.

So How Is Incredible Industries' ROCE Trending?

In terms of Incredible Industries' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 24% 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. 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 Incredible Industries to turn into a multi-bagger.

On a related note, Incredible Industries has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Incredible Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Incredible Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

While Incredible 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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