Return Trends At Go Fashion (India) (NSE:GOCOLORS) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Go Fashion (India)'s (NSE:GOCOLORS) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Go Fashion (India), this is the formula:

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

0.17 = ₹1.2b ÷ (₹8.6b - ₹1.7b) (Based on the trailing twelve months to December 2022).

Thus, Go Fashion (India) has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Specialty Retail industry.

Check out our latest analysis for Go Fashion (India)

In the above chart we have measured Go Fashion (India)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Go Fashion (India).

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past three years, ROCE has remained relatively flat at around 17% and the business has deployed 66% more capital into its operations. 17% is a pretty standard return, and it provides some comfort knowing that Go Fashion (India) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last three years. This is intriguing because if current liabilities hadn't increased to 19% of total assets, this reported ROCE would probably be less than17% because total capital employed would be higher.The 17% ROCE could be even lower if current liabilities weren't 19% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

Our Take On Go Fashion (India)'s ROCE

In the end, Go Fashion (India) has proven its ability to adequately reinvest capital at good rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

While Go Fashion (India) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.