Returns On Capital Signal Tricky Times Ahead For N R Agarwal Industries (NSE:NRAIL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think N R Agarwal Industries (NSE:NRAIL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for N R Agarwal Industries, this is the formula:

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

0.17 = ₹1.2b ÷ (₹10b - ₹3.2b) (Based on the trailing twelve months to June 2022).

So, N R Agarwal Industries has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Packaging industry.

Check out the opportunities and risks within the IN Packaging industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for N R Agarwal Industries' ROCE against it's prior returns. If you're interested in investigating N R Agarwal Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From N R Agarwal Industries' ROCE Trend?

On the surface, the trend of ROCE at N R Agarwal Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 24% 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From N R Agarwal Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that N R Agarwal Industries is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 23% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing N R Agarwal Industries we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.