Returns On Capital At Indian Terrain Fashions (NSE:INDTERRAIN) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Indian Terrain Fashions (NSE:INDTERRAIN) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Indian Terrain Fashions is:

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

0.11 = ₹308m ÷ (₹5.5b – ₹2.6b) (Based on the trailing twelve months to September 2022).

So, Indian Terrain Fashions has an ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 13% generated by the Luxury industry.

Our analysis indicates that INDTERRAIN is potentially undervalued!

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 want to delve into the historical earnings, revenue and cash flow of Indian Terrain Fashions, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Indian Terrain Fashions, we didn’t gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 48%, which has impacted the ROCE. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. 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.

What We Can Learn From Indian Terrain Fashions’ ROCE

In summary, despite lower returns in the short term, we’re encouraged to see that Indian Terrain Fashions is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 58% in the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.

If you’d like to know more about Indian Terrain Fashions, we’ve spotted 5 warning signs, and 1 of them can’t be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.