The Returns On Capital At Khadim India (NSE:KHADIM) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Khadim India (NSE:KHADIM) and its ROCE trend, we weren't exactly thrilled.

What is 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 Khadim India, this is the formula:

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

0.044 = ₹142m ÷ (₹6.5b - ₹3.3b) (Based on the trailing twelve months to March 2022).

Therefore, Khadim India has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 10%.

View our latest analysis for Khadim India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Khadim India's ROCE against it's prior returns. If you're interested in investigating Khadim India's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Khadim India's ROCE Trending?

When we looked at the ROCE trend at Khadim India, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. 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 the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Khadim India has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Khadim India's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 1.2% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Khadim India does have some risks, we noticed 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.