Be Wary Of S Chand (NSE:SCHAND) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Although, when we looked at S Chand (NSE:SCHAND), it didn't seem to tick all of these boxes.

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 S Chand is:

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

0.058 = ₹510m ÷ (₹12b - ₹2.7b) (Based on the trailing twelve months to December 2020).

So, S Chand has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Media industry average of 13%.

Check out our latest analysis for S Chand

Above you can see how the current ROCE for S Chand compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering S Chand here for free.

So How Is S Chand's ROCE Trending?

When we looked at the ROCE trend at S Chand, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 16% five years ago. 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.

Our Take On S Chand's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for S Chand have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 72% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for S Chand (of which 1 can't be ignored!) that you should know about.

While S Chand 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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