Returns On Capital - An Important Metric For India Tourism Development (NSE:ITDC)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in India Tourism Development's (NSE:ITDC) returns on capital, so let's have a look.

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

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 India Tourism Development is:

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

0.065 = ₹240m ÷ (₹6.3b - ₹2.6b) (Based on the trailing twelve months to December 2019).

Thus, India Tourism Development has an ROCE of 6.5%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

View our latest analysis for India Tourism Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for India Tourism Development's ROCE against it's prior returns. If you'd like to look at how India Tourism Development 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

India Tourism Development has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 49,946% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, India Tourism Development's current liabilities are still rather high at 41% of total assets. 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.

The Key Takeaway

To sum it up, India Tourism Development is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 58% in the last three years, there could be a chance of a good investment here if the valuation makes sense. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 3 warning signs facing India Tourism Development that you might find interesting.

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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