Has Plastiblends India (NSE:PLASTIBLEN) Got What It Takes To Become A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Plastiblends India (NSE:PLASTIBLEN) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Plastiblends India:

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

0.13 = ₹431m ÷ (₹4.0b - ₹648m) (Based on the trailing twelve months to September 2020).

So, Plastiblends India has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

View our latest analysis for Plastiblends India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Plastiblends India, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Plastiblends India, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Plastiblends India has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Plastiblends India because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Plastiblends India (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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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