Sandesh (NSE:SANDESH) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Sandesh (NSE:SANDESH), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sandesh, this is the formula:

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

0.13 = ₹1.2b ÷ (₹9.9b - ₹559m) (Based on the trailing twelve months to September 2021).

So, Sandesh has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Media industry average of 12%.

See our latest analysis for Sandesh

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sandesh's ROCE against it's prior returns. 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 13% from 20% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Sandesh's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sandesh. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 1 warning sign for Sandesh you'll probably want to know about.

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.