What We Make Of Shree Rama Multi-Tech's (NSE:SHREERAMA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Shree Rama Multi-Tech's (NSE:SHREERAMA) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Shree Rama Multi-Tech:

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

0.087 = ₹83m ÷ (₹1.2b - ₹247m) (Based on the trailing twelve months to March 2020).

So, Shree Rama Multi-Tech has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 13%.

See our latest analysis for Shree Rama Multi-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shree Rama Multi-Tech's ROCE against it's prior returns. If you'd like to look at how Shree Rama Multi-Tech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Shree Rama Multi-Tech's ROCE Trending?

It's great to see that Shree Rama Multi-Tech has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 44%. 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 20% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Shree Rama Multi-Tech's ROCE

In the end, Shree Rama Multi-Tech has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 11% in the last five years, there could be a chance of a good investment here if the valuation makes sense. With that in mind, we believe the promising trends warrant this stock for further investigation.

Shree Rama Multi-Tech does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

While Shree Rama Multi-Tech 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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