Sreeleathers (NSE:SREEL) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think Sreeleathers (NSE:SREEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.094 = ₹357m ÷ (₹3.9b - ₹121m) (Based on the trailing twelve months to June 2023).

So, Sreeleathers has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.4% generated by the Retail Distributors industry, it's much better.

See our latest analysis for Sreeleathers

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

How Are Returns Trending?

On the surface, the trend of ROCE at Sreeleathers doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.4% from 12% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Sreeleathers is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 60% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Sreeleathers we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Sreeleathers 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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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.