Be Wary Of Texmo Pipes and Products (NSE:TEXMOPIPES) And Its Returns On Capital

April 04, 2021

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Texmo Pipes and Products (NSE:TEXMOPIPES), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Texmo Pipes and Products:

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

0.075 = ₹183m ÷ (₹3.4b - ₹993m) (Based on the trailing twelve months to December 2020).

So, Texmo Pipes and Products has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

Check out our latest analysis for Texmo Pipes and Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for Texmo Pipes and Products' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Texmo Pipes and Products, check out these free graphs here.

What Does the ROCE Trend For Texmo Pipes and Products Tell Us?

In terms of Texmo Pipes and Products' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.5% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Texmo Pipes and Products has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that Texmo Pipes and Products is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 3 warning signs for Texmo Pipes and Products you'll probably want to know about.

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. 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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