Has Poddar Pigments (NSE:PODDARMENT) Got What It Takes To Become A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Poddar Pigments (NSE:PODDARMENT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Poddar Pigments, this is the formula:

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

0.099 = ₹214m ÷ (₹2.4b - ₹201m) (Based on the trailing twelve months to December 2020).

Thus, Poddar Pigments has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

View our latest analysis for Poddar Pigments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Poddar Pigments' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Poddar Pigments, check out these free graphs here.

What Can We Tell From Poddar Pigments' ROCE Trend?

On the surface, the trend of ROCE at Poddar Pigments doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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.

On a related note, Poddar Pigments has decreased its current liabilities to 8.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Poddar Pigments' ROCE

We're a bit apprehensive about Poddar Pigments because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Poddar Pigments does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Poddar Pigments 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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