Some Investors May Be Worried About Metro Brands' (NSE:METROBRAND) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Metro Brands (NSE:METROBRAND) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Metro Brands:

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

0.18 = ₹4.8b ÷ (₹32b - ₹5.3b) (Based on the trailing twelve months to September 2023).

So, Metro Brands has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% generated by the Specialty Retail industry.

See our latest analysis for Metro Brands

Above you can see how the current ROCE for Metro Brands compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Metro Brands' ROCE Trending?

When we looked at the ROCE trend at Metro Brands, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Metro Brands in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 71% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Metro Brands it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Metro Brands isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.