Rain Industries (NSE:RAIN) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Rain Industries (NSE:RAIN) we aren't filled with optimism, but let's investigate further.

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 Rain Industries, this is the formula:

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

0.026 = ₹4.0b ÷ (₹192b - ₹38b) (Based on the trailing twelve months to September 2024).

Thus, Rain Industries has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for Rain Industries

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 , check out these free graphs detailing revenue and cash flow performance of Rain Industries.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Rain Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.8% 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. If these trends continue, we wouldn't expect Rain Industries to turn into a multi-bagger.

The Bottom Line On Rain Industries' ROCE

In summary, it's unfortunate that Rain Industries is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 30% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Rain Industries (at least 2 which can't be ignored) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.