Kansai Nerolac Paints (NSE:KANSAINER) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Kansai Nerolac Paints (NSE:KANSAINER) 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. Analysts use this formula to calculate it for Kansai Nerolac Paints:

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

0.12 = ₹5.4b ÷ (₹57b - ₹13b) (Based on the trailing twelve months to June 2022).

Therefore, Kansai Nerolac Paints has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

Our analysis indicates that KANSAINER is potentially overvalued!

Above you can see how the current ROCE for Kansai Nerolac Paints compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kansai Nerolac Paints here for free.

What Does the ROCE Trend For Kansai Nerolac Paints Tell Us?

On the surface, the trend of ROCE at Kansai Nerolac Paints doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Kansai Nerolac Paints' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kansai Nerolac Paints. These trends are starting to be recognized by investors since the stock has delivered a 0.4% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Kansai Nerolac Paints, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Kansai Nerolac Paints 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.