Returns On Capital At Prakash Industries (NSE:PRAKASH) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Prakash Industries (NSE:PRAKASH), the trends above didn't look too great.

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 Prakash Industries is:

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

0.11 = ₹3.6b ÷ (₹41b - ₹7.8b) (Based on the trailing twelve months to June 2024).

So, Prakash Industries has an ROCE of 11%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 15%, it's not as good.

Check out our latest analysis for Prakash Industries

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Prakash Industries. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Prakash Industries becoming one if things continue as they have.

Our Take On Prakash Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Since the stock has skyrocketed 435% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Prakash Industries does have some risks though, and we've spotted 1 warning sign for Prakash Industries that you might be interested in.

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.