Is There More Growth In Store For Sreeleathers' (NSE:SREEL) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Sreeleathers (NSE:SREEL) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sreeleathers is:

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

0.085 = ₹279m ÷ (₹3.5b - ₹203m) (Based on the trailing twelve months to June 2020).

So, Sreeleathers has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Retail Distributors industry average of 3.4%.

See our latest analysis for Sreeleathers

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're interested in investigating Sreeleathers' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sreeleathers' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 66% more capital is being employed now too. 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.

In Conclusion...

In summary, it's great to see that Sreeleathers 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 11% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Sreeleathers, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Sreeleathers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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