Can Godrej Industries (NSE:GODREJIND) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Godrej Industries' (NSE:GODREJIND) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Godrej Industries is:

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

0.11 = ₹11b ÷ (₹205b - ₹102b) (Based on the trailing twelve months to March 2020).

So, Godrej Industries has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Industrials industry.

See our latest analysis for Godrej 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'd like to look at how Godrej Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trends we've noticed at Godrej Industries are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 66%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Godrej Industries has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Godrej Industries' ROCE

In summary, it's great to see that Godrej Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 7.2% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Godrej Industries, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Godrej Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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