Regardless of a company’s stock price, what are the underlying trends that tell us that a company is past the growth stage? A potentially declining business often exhibits two trends, one return on capital employed (ROCE) down, and a based capital employed which is also declining. Such trends ultimately mean that the company is reducing its investments and also earning less on what it has invested. That said, after a brief glimpse, Archidply Industries (NSE: ARCHIDPLY) We’re not very optimistic, but we’re digging deeper into our research.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Archidply Industries, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.081 = â¹ 81m Ã· (â¹ 1.8b – â¹ 786m) (Based on the last twelve months up to December 2020).
Therefore, Archidply Industries has a ROCE of 8.1%. At the end of the day, that’s a low yield and it’s 10% below the forest industry average.
Check out our latest review for Archidply Industries
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to look at Archidply Industries’ performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
In terms of Archidply Industries’ historic ROCE trend, that’s not great. To be more precise, today’s ROCE was 13% five years ago, but has since fallen to 8.1%. Equally concerning is that the amount of capital deployed in the company has decreased by 22% over the same period. The fact that both are declining is an indication that the business is going through tough times. Usually, the companies that exhibit these characteristics are not the ones that tend to multiply in the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.
In addition, Archidply Industries’ short-term liabilities remain quite high at 44% of total assets. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.
What we can learn from Archidply Industries’ ROCE
In short, lower returns and diminishing amounts of capital employed in the business do not give us confidence. So it’s no surprise that the stock has fallen 11% in the past five years, so it looks like investors are recognizing these changes. Unless there is a change to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know more about Archidply Industries, we have spotted 4 warning signs, and 3 of them should not be ignored.
Although Archidply Industries does not generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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