Here's What's Concerning About Responsive Industries' (NSE:RESPONIND) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Responsive Industries (NSE:RESPONIND), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Responsive Industries is:

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

0.017 = ₹171m ÷ (₹14b - ₹3.9b) (Based on the trailing twelve months to December 2022).

Therefore, Responsive Industries has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.

See our latest analysis for Responsive Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Responsive Industries' ROCE against it's prior returns. If you're interested in investigating Responsive Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Responsive Industries Tell Us?

There is reason to be cautious about Responsive Industries, given the returns are trending downwards. To be more specific, the ROCE was 2.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Responsive Industries becoming one if things continue as they have.

Our Take On Responsive Industries' ROCE

In summary, it's unfortunate that Responsive Industries is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 110%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing Responsive Industries that you might find interesting.

While Responsive Industries 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. 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.