Investors Could Be Concerned With Urja Global's (NSE:URJA) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Urja Global (NSE:URJA), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Urja Global, this is the formula:

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

0.0056 = ₹9.8m ÷ (₹5.3b - ₹3.5b) (Based on the trailing twelve months to June 2021).

Therefore, Urja Global has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.7%.

Check out our latest analysis for Urja Global

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're interested in investigating Urja Global's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Urja Global's ROCE Trend?

We are a bit worried about the trend of returns on capital at Urja Global. Unfortunately the returns on capital have diminished from the 1.1% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Urja Global to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 67%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

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. Since the stock has skyrocketed 508% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Urja Global that you might find interesting.

While Urja Global isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.