Plastiblends India (NSE:PLASTIBLEN) Is Reinvesting At Lower Rates Of Return

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Plastiblends India (NSE:PLASTIBLEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. The formula for this calculation on Plastiblends India is:

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

0.13 = ₹445m ÷ (₹4.0b - ₹648m) (Based on the trailing twelve months to December 2020).

So, Plastiblends India 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 Plastiblends India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Plastiblends India's ROCE against it's prior returns. If you'd like to look at how Plastiblends India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Plastiblends India's ROCE Trending?

On the surface, the trend of ROCE at Plastiblends India doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 13%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, Plastiblends India has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, we're somewhat concerned by Plastiblends India's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 14% 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 final note, you should learn about the 3 warning signs we've spotted with Plastiblends India (including 1 which is concerning) .

While Plastiblends India 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. 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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