Here's What To Make Of Seya Industries' (NSE:SEYAIND) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Seya Industries (NSE:SEYAIND) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Seya Industries:

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

0.03 = ₹511m ÷ (₹18b - ₹975m) (Based on the trailing twelve months to March 2020).

So, Seya Industries has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

See our latest analysis for Seya 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, revenue and cash flow of Seya Industries, check out these free graphs here.

So How Is Seya Industries' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 4.1% five years ago, while capital employed has grown 204%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Seya Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Seya Industries' ROCE

We're a bit apprehensive about Seya Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 81% over the last year, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Seya Industries (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Seya 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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