Capital Allocation Trends At B.A.G. Films and Media (NSE:BAGFILMS) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into B.A.G. Films and Media (NSE:BAGFILMS), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for B.A.G. Films and Media:

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

0.024 = ₹56m ÷ (₹3.7b - ₹1.4b) (Based on the trailing twelve months to June 2021).

So, B.A.G. Films and Media has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Media industry average of 12%.

Check out our latest analysis for B.A.G. Films and Media

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

So How Is B.A.G. Films and Media's ROCE Trending?

In terms of B.A.G. Films and Media's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.6% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect B.A.G. Films and Media to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that B.A.G. Films and Media is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 45% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for B.A.G. Films and Media (2 are a bit concerning) you should be aware of.

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. 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.
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