Our Take On The Returns On Capital At Sandesh (NSE:SANDESH)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sandesh (NSE:SANDESH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sandesh is:

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

0.10 = ₹847m ÷ (₹8.9b - ₹454m) (Based on the trailing twelve months to September 2020).

Therefore, Sandesh has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Media industry.

Check out our latest analysis for Sandesh

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 Sandesh, check out these free graphs here.

What Does the ROCE Trend For Sandesh Tell Us?

When we looked at the ROCE trend at Sandesh, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Sandesh has decreased its current liabilities to 5.1% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Sandesh's ROCE

In summary, we're somewhat concerned by Sandesh's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 31% 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.

If you'd like to know more about Sandesh, we've spotted 3 warning signs, and 2 of them are concerning.

While Sandesh 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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