Can Ballarpur Industries (NSE:BALLARPUR) Continue To Grow Its Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Ballarpur Industries (NSE:BALLARPUR) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ballarpur Industries:

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

0.12 = ₹3.5b ÷ (₹112b - ₹84b) (Based on the trailing twelve months to December 2019).

Therefore, Ballarpur Industries has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Forestry industry.

View our latest analysis for Ballarpur Industries

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 Ballarpur Industries, check out these free graphs here.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Ballarpur Industries. The figures show that over the last five years, returns on capital have grown by 164%. The company is now earning ₹0.1 per dollar of capital employed. In regards to capital employed, Ballarpur Industries appears to been achieving more with less, since the business is using 64% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 74% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Ballarpur Industries' ROCE

In a nutshell, we're pleased to see that Ballarpur Industries has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 87% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ballarpur Industries (of which 1 shouldn't be ignored!) that you should know about.

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

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