Is K.C.P. Sugar and Industries (NSE:KCPSUGIND) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, we've noticed some promising trends at K.C.P. Sugar and Industries (NSE:KCPSUGIND) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on K.C.P. Sugar and Industries is:

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

0.029 = ₹111m ÷ (₹6.8b - ₹3.0b) (Based on the trailing twelve months to March 2020).

Therefore, K.C.P. Sugar and Industries has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

See our latest analysis for K.C.P. Sugar and 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 K.C.P. Sugar and Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

K.C.P. Sugar and Industries has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.9% on its capital. And unsurprisingly, like most companies trying to break into the black, K.C.P. Sugar and Industries is utilizing 25% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, K.C.P. Sugar and Industries has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From K.C.P. Sugar and Industries' ROCE

Overall, K.C.P. Sugar and Industries gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 4.6% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we found 2 warning signs for K.C.P. Sugar and Industries (1 is a bit unpleasant) you should be aware of.

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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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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