Here's What We Make Of Tribhovandas Bhimji Zaveri's (NSE:TBZ) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Tribhovandas Bhimji Zaveri (NSE:TBZ), we weren't too upbeat about how things were going.

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. To calculate this metric for Tribhovandas Bhimji Zaveri, this is the formula:

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

0.082 = ₹451m ÷ (₹15b - ₹9.2b) (Based on the trailing twelve months to September 2020).

Therefore, Tribhovandas Bhimji Zaveri has an ROCE of 8.2%. On its own, that's a low figure but it's around the 10.0% average generated by the Specialty Retail industry.

View our latest analysis for Tribhovandas Bhimji Zaveri

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

So How Is Tribhovandas Bhimji Zaveri's ROCE Trending?

There is reason to be cautious about Tribhovandas Bhimji Zaveri, given the returns are trending downwards. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tribhovandas Bhimji Zaveri becoming one if things continue as they have.

On a separate but related note, it's important to know that Tribhovandas Bhimji Zaveri has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. 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 Tribhovandas Bhimji Zaveri's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 58% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Tribhovandas Bhimji Zaveri, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Tribhovandas Bhimji Zaveri 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.

If you’re looking to trade Tribhovandas Bhimji Zaveri, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.