Investors Could Be Concerned With Sirca Paints India's (NSE:SIRCA) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Sirca Paints India (NSE:SIRCA), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sirca Paints India, this is the formula:

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

0.042 = ₹85m ÷ (₹2.5b - ₹529m) (Based on the trailing twelve months to March 2021).

So, Sirca Paints India has an ROCE of 4.2%. In absolute terms, that's a low return, but it's much better than the Retail Distributors industry average of 2.7%.

View our latest analysis for Sirca Paints India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sirca Paints India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sirca Paints India, check out these free graphs here.

What Can We Tell From Sirca Paints India's ROCE Trend?

When we looked at the ROCE trend at Sirca Paints India, we didn't gain much confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 4.2%. However it looks like Sirca Paints 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 related note, Sirca Paints India has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Sirca Paints India's ROCE

To conclude, we've found that Sirca Paints India is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 281% gain to shareholders who have held over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with Sirca Paints India and understanding them should be part of your investment process.

While Sirca Paints India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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