Returns on capital at Siyaram Silk Mills (NSE: SIYSIL) do not inspire confidence

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Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigation Siyaram silk mills (NSE: SIYSIL), we don’t think the current trends fit the mold of a multi-bagger.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Siyaram Silk Mills:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.11 = ₹ 988m ÷ (₹ 12b – ₹ 2.9b) (Based on the last twelve months up to June 2021).

Therefore, Siyaram Silk Mills has a ROCE of 11%. This is a relatively normal return on capital, and it hovers around the 12% generated by the luxury goods industry.

See our latest review for Siyaram Silk Mills

NSEI: SIYSIL Return on capital employed October 5, 2021

In the graph above, we measured Siyaram Silk Mills’ past ROCE against their past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

What the ROCE trend can tell us

When we looked at the ROCE trend at Siyaram Silk Mills, we didn’t gain much trust. To be more precise, ROCE has increased from 23% over the past five years. However, it looks like Siyaram Silk Mills is reinvesting for long-term growth, because while the capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It may take some time for the business to begin to see a change in the benefits of these investments.

In addition, Siyaram Silk Mills has done well to reduce its current liabilities to 24% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.

The key to take away

In summary, Siyaram Silk Mills is reinvesting funds in the business for growth, but sadly it looks like sales haven’t grown much yet. Although the market should expect these trends to improve as the stock has gained 44% over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.

One last thing to note, we have identified 2 warning signs with Siyaram Silk Mills and understanding them should be part of your investment process.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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