Snowman Logistics (NSE:SNOWMAN) May Have Issues Allocating Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. 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 Snowman Logistics (NSE:SNOWMAN), we weren't too upbeat about how things were going.

What is 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. The formula for this calculation on Snowman Logistics is:

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

0.026 = ₹160m ÷ (₹6.7b - ₹422m) (Based on the trailing twelve months to March 2021).

Therefore, Snowman Logistics has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Logistics industry average of 12%.

View our latest analysis for Snowman Logistics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Snowman Logistics' ROCE against it's prior returns. If you'd like to look at how Snowman Logistics 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

There is reason to be cautious about Snowman Logistics, given the returns are trending downwards. To be more specific, the ROCE was 3.3% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Snowman Logistics to turn into a multi-bagger.

The Bottom Line On Snowman Logistics' 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 31% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Snowman Logistics, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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