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’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 back into the business at ever-higher rates of return. With that in mind, the ROCE of Sanwaria Consumer (NSE:SANWARIA) looks great, so lets see what the trend can tell us.
What is 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 Sanwaria Consumer is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.37 = ₹2.7b ÷ (₹18b – ₹11b) (Based on the trailing twelve months to March 2019).
Therefore, Sanwaria Consumer has an ROCE of 37%. In absolute terms that’s a great return and it’s even better than the Food industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanwaria Consumer’s ROCE against it’s prior returns. If you’d like to look at how Sanwaria Consumer has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Sanwaria Consumer’s ROCE Trending?
Sanwaria Consumer is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 37%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 115%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.One more thing to note, Sanwaria Consumer has decreased current liabilities to 60% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Bottom Line On Sanwaria Consumer’s ROCE
In summary, it’s great to see that Sanwaria Consumer 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. And since the stock has fallen 3.7% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 4 warning signs we’ve spotted with Sanwaria Consumer (including 1 which is is significant) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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