Is Responsive Industries (NSE:RESPONIND) Set To Make A Turnaround?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Responsive Industries (NSE:RESPONIND), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Responsive Industries, this is the formula:

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

0.014 = ₹166m ÷ (₹15b - ₹3.1b) (Based on the trailing twelve months to September 2020).

Thus, Responsive Industries has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Responsive Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Responsive Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.0% that they were earning five years ago. 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. Yet despite these concerning fundamentals, the stock has performed strongly with a 93% return over the last five years, so investors appear very optimistic. 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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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