Can Cupid (NSE:CUPID) Keep Up These Impressive Returns?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Cupid (NSE:CUPID) looks attractive right now, so lets see what the trend of returns can tell us.

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 Cupid:

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

0.45 = ₹471m ÷ (₹1.6b - ₹591m) (Based on the trailing twelve months to June 2020).

Therefore, Cupid has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

View our latest analysis for Cupid

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cupid's ROCE against it's prior returns. If you're interested in investigating Cupid's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Cupid's ROCE Trending?

It's hard not to be impressed by Cupid's returns on capital. The company has employed 300% more capital in the last five years, and the returns on that capital have remained stable at 45%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Cupid can keep this up, we'd be very optimistic about its future.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than45% because total capital employed would be higher.The 45% ROCE could be even lower if current liabilities weren't 36% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Cupid's ROCE

In short, we'd argue Cupid has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last three years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing to note, we've identified 3 warning signs with Cupid and understanding these should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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