Capital Allocation Trends At Sreeleathers (NSE:SREEL) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Sreeleathers (NSE:SREEL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Sreeleathers:

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

0.048 = ₹164m ÷ (₹3.6b - ₹202m) (Based on the trailing twelve months to December 2020).

Therefore, Sreeleathers has an ROCE of 4.8%. On its own that's a low return, but compared to the average of 2.7% generated by the Retail Distributors industry, it's much better.

Check out our latest analysis for Sreeleathers

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 Sreeleathers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sreeleathers' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 7.1% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Sreeleathers' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sreeleathers have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Sreeleathers that we think you should be aware of.

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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