There Are Reasons To Feel Uneasy About Kansai Nerolac Paints' (NSE:KANSAINER) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)?

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. The formula for this calculation on Kansai Nerolac Paints is:

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

0.13 = ₹7.7b ÷ (₹77b - ₹17b) (Based on the trailing twelve months to September 2024).

So, Kansai Nerolac Paints has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

View 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, you can check out the forecasts from the analysts covering Kansai Nerolac Paints for free.

So How Is Kansai Nerolac Paints' ROCE Trending?

On the surface, the trend of ROCE at Kansai Nerolac Paints doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 18% five years ago. 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.

In Conclusion...

In summary, Kansai Nerolac Paints 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 27% in the last five years. Therefore based on the analysis done in this article, we don't think Kansai Nerolac Paints has the makings of a multi-bagger.

If you'd like to know about the risks facing Kansai Nerolac Paints, we've discovered 2 warning signs that you should be aware of.

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.

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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.