Here's What's Concerning About B.A.G. Films and Media's (NSE:BAGFILMS) Returns On Capital

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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at B.A.G. Films and Media (NSE:BAGFILMS), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.045 = ₹104m ÷ (₹3.8b - ₹1.5b) (Based on the trailing twelve months to September 2021).

Therefore, B.A.G. Films and Media has an ROCE of 4.5%. Ultimately, that's a low return and it 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?

There is reason to be cautious about B.A.G. Films and Media, given the returns are trending downwards. To be more specific, the ROCE was 8.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

What We Can Learn From B.A.G. Films and Media's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing B.A.G. Films and Media we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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.