What Do The Returns On Capital At Kansai Nerolac Paints (NSE:KANSAINER) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Kansai Nerolac Paints (NSE:KANSAINER), we don't think it's current trends fit the mold of a multi-bagger.

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

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. 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)

0.13 = ₹5.2b ÷ (₹50b - ₹11b) (Based on the trailing twelve months to September 2020).

So, Kansai Nerolac Paints has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 15%.

View our latest analysis for Kansai Nerolac Paints

In the above chart we have measured Kansai Nerolac Paints' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kansai Nerolac Paints.

How Are Returns Trending?

In terms of Kansai Nerolac Paints' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Kansai Nerolac Paints' ROCE

We're a bit apprehensive about Kansai Nerolac Paints because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 128%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in Kansai Nerolac Paints it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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