There Are Reasons To Feel Uneasy About Shree Tirupati Balajee FIBC's (NSE:TIRUPATI) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shree Tirupati Balajee FIBC (NSE:TIRUPATI) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Shree Tirupati Balajee FIBC is:

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

0.17 = ₹144m ÷ (₹1.2b - ₹357m) (Based on the trailing twelve months to March 2023).

So, Shree Tirupati Balajee FIBC has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Packaging industry.

Check out our latest analysis for Shree Tirupati Balajee FIBC

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

So How Is Shree Tirupati Balajee FIBC's ROCE Trending?

When we looked at the ROCE trend at Shree Tirupati Balajee FIBC, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Shree Tirupati Balajee FIBC has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Shree Tirupati Balajee FIBC's ROCE

In summary, we're somewhat concerned by Shree Tirupati Balajee FIBC's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 148% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shree Tirupati Balajee FIBC does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

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.