Sarla Performance Fibers (NSE: SARLAPOLY) may have problems allocating its capital

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What underlying fundamental trends can indicate that a business may be in decline? Declining businesses often have two underlying trends, on the one hand, a decline return on capital employed (ROCE) and a decrease based capital employed. This tells us that the company is not only reducing the size of its net assets, but that its returns are also decreasing. On that note, examining Sarla performance fibers (NSE: SARLAPOLY), we weren’t too optimistic about the way things were going.

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 Sarla Performance Fibers:

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

0.075 = ÷ 305m (₹ 5.9b – ₹ 1.8b) (Based on the last twelve months up to March 2021).

Therefore, Sarla Performance Fibers has a ROCE of 7.5%. At the end of the day, that’s a low return and it’s lower than the luxury industry average of 9.9%.

See our latest review for Sarla Performance Fibers

NSEI: SARLAPOLY Return on capital employed on July 4, 2021

Historical performance is a great place to start when looking for a stock. So you can see above the gauge of the ROCE of Sarla Performance Fibers compared to its previous yields. If you want to delve into Sarla Performance Fibers earnings, income and cash flow history, check out these free graphics here.

So what is the ROCE trend of Sarla Performance Fibers?

Sarla Performance Fibers should be cautious as the yields are trending downwards. About five years ago, returns on capital were 10%, but they are now significantly lower than that, as we saw above. During this time, the capital employed in the company remained roughly stable over the period. This combination may be indicative of a mature company that still has areas to deploy capital, but the returns received are not as high potentially due to new competition or lower margins. If these trends continue, we don’t expect Sarla Performance Fibers to turn into a multi-bagger.

The essentials on the ROCE of Sarla Performance Fibers

Ultimately, the downward trend in returns on the same amount of capital is generally not an indication that we are considering a growth stock. So it’s no surprise that the stock has fallen 28% 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.

Sarla Performance Fibers does, however, carry certain risks, we have found 3 warning signs in our investment analysis, and 1 of them is a bit rude …

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.

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This Simply Wall St article is general in nature. 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 the mentioned stocks.
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