Investors Met With Slowing Returns on Capital At Shankara Building Products (NSE:SHANKARA)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So, when we ran our eye over Shankara Building Products' (NSE:SHANKARA) trend of ROCE, we liked what we saw.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shankara Building Products is:

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

0.17 = ₹1.4b ÷ (₹17b - ₹8.4b) (Based on the trailing twelve months to December 2024).

Thus, Shankara Building Products has an ROCE of 17%. 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 Shankara Building Products

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shankara Building Products has performed in the past in other metrics, you can view this free graph of Shankara Building Products' past earnings, revenue and cash flow.

So How Is Shankara Building Products' ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 57% more capital into its operations. 17% is a pretty standard return, and it provides some comfort knowing that Shankara Building Products has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Shankara Building Products has a high ratio of current liabilities to total assets of 50%. 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.

What We Can Learn From Shankara Building Products' ROCE

The main thing to remember is that Shankara Building Products has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 181% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Shankara Building Products you'll probably want to know about.

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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.