Relaxo Footwears (NSE:RELAXO) is looking to reverse its return trends

Finding a company that has the potential to grow substantially isn’t easy, but it is possible if we look at a few key financial metrics. We want to see two things, among other things; primarily a growing one yield on invested capital (ROCE) and secondly on an expansion of the company quantity of the invested capital. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. In light of that, when we looked at it Relaxo shoes (NSE:RELAXO) and the ROCE trend, we were not exactly enthusiastic.

Understanding return on capital employed (ROCE)

For those unsure of what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Relaxo Footwears:

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

0.13 = ₹2.6 billion ÷ (₹26 billion – ₹5.4 billion) (Based on the last twelve months up to and including December 2023).

So, Relaxo Footwears has a ROCE of 13%. That in itself is a standard return, but it is much better than the 11% that the luxury industry generates.

Check out our latest analysis for Relaxo Footwears

Above you can see how the current ROCE for Relaxo Footwears compares to its past return on capital, but there’s only so much you can tell from the past. If you want to see what analysts are predicting for the future, check out our free analyst report for Relaxo Footwears.

What the ROCE trend can tell us

At first glance, the ROCE trend at Relaxo Footwears does not inspire confidence. To be more specific, ROCE has fallen from 30% over the past five years. Meanwhile, the company is using more capital, but this hasn’t changed sales much over the last twelve months, so this could reflect longer-term investment. It may take some time before the company begins to see any change in income from these investments.

In connection with this, Relaxo Footwears has reduced its current liabilities to 20% of total assets. So we can link some of this to the decline in ROCE. In effect, this means that their suppliers or short-term creditors finance less of the business, reducing certain elements of risk. Some argue that this reduces the company’s efficiency in generating ROCE, as it now finances a greater portion of its operations with its own money.

It comes down to

Finally, we noted that Relaxo Footwears is reinvesting in the business, but returns have declined. Considering the stock has gained an impressive 92% over the past five years, investors must think better things are ahead. But if the trajectory of these underlying trends continues, we don’t think the chances of this being a multi-bagger are high.

Relaxo Footwears trades at an attractive price in other respects, so you may find our free intrinsic value estimate for RELAXO on our platform quite valuable.

While Relaxo Footwears doesn’t get the highest returns, look at this free list of companies that achieve a high return on equity with solid balance sheets.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.