If you envision a mature business that is past the growth stage, what are the underlying trends that emerge? More often than not we will see a decline to recover on capital employed (ROCE) and a decrease amount 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 Sangam (India) (NSE: SANGAMIND), we weren’t too optimistic about how things were going.
What is Return on Employee Capital (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 Sangam (India):
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.13 = ₹ 1.1b ÷ (₹ 14b – ₹ 6.0b) (Based on the last twelve months up to June 2021).
Therefore, Sangam (India) has a ROCE of 13%. This is a relatively normal return on capital, and it hovers around the 12% generated by the luxury goods industry.
Check out our latest analysis for Sangam (India)
Historical performance is a great place to start when researching a stock, so above you can see Sangam (India) ‘s ROCE gauge against its past returns. If you want to look at Sangam (India) performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.
What can we say about the ROCE trend of Sangam (India)?
Sangam (India) should be cautious as yields are trending down. Unfortunately, returns on capital have fallen from the 19% they earned five years ago. And on the capital employed front, the company is using roughly the same amount of capital as it was back in the day. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. If these trends continue, we don’t expect Sangam (India) to turn into a multi-bagger.
Another thing to note, Sangam (India) has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) fund a large part 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.
Our opinion on Sangam’s ROCE (India)
In summary, it is unfortunate that Sangam (India) generates lower returns from the same amount of capital. Investors did not like these developments as the stock fell 27% from five years ago. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
If you want to know some of the risks that Sangam (India) faces, we have found 5 warning signs (2 shouldn’t be ignored!) Which you should be aware of before investing here.
Although Sangam (India) does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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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