Returns On Capital At Khadim India (NSE:KHADIM) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Khadim India (NSE:KHADIM), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. The formula for this calculation on Khadim India is:

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

0.03 = ₹124m ÷ (₹8.2b - ₹4.2b) (Based on the trailing twelve months to December 2019).

Therefore, Khadim India has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.

Check out our latest analysis for Khadim India

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Khadim India doesn't inspire confidence. Around five years ago the returns on capital were 3.9%, but since then they've fallen to 3.0%. However it looks like Khadim India might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in recent times. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Khadim India has decreased its current liabilities to 51% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Khadim India's ROCE

To conclude, we've found that Khadim India is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Khadim India we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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