Kansai Nerolac Paints' (NSE:KANSAINER) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Kansai Nerolac Paints (NSE:KANSAINER) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Kansai Nerolac Paints, this is the formula:

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

0.16 = ₹7.0b ÷ (₹57b - ₹14b) (Based on the trailing twelve months to September 2021).

Thus, Kansai Nerolac Paints has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

See our latest analysis for Kansai Nerolac Paints

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 to see what analysts are forecasting going forward, you should check out our free report for Kansai Nerolac Paints.

What Can We Tell From Kansai Nerolac Paints' ROCE Trend?

When we looked at the ROCE trend at Kansai Nerolac Paints, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Kansai Nerolac Paints' ROCE

While returns have fallen for Kansai Nerolac Paints in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Kansai Nerolac Paints, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Kansai Nerolac Paints isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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