What We Make Of Harrisons Malayalam's (NSE:HARRMALAYA) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Harrisons Malayalam (NSE:HARRMALAYA) and its trend of ROCE, we really liked what we saw.

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

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 Harrisons Malayalam is:

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

0.10 = ₹187m ÷ (₹4.0b - ₹2.2b) (Based on the trailing twelve months to June 2020).

So, Harrisons Malayalam has an ROCE of 10.0%. On its own, that's a low figure but it's around the 12% average generated by the Food industry.

Check out our latest analysis for Harrisons Malayalam

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

Like most people, we're pleased that Harrisons Malayalam is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 10.0% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 51%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 53% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Harrisons Malayalam's ROCE

In a nutshell, we're pleased to see that Harrisons Malayalam has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Harrisons Malayalam we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Harrisons Malayalam 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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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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