Pavna Industries (NSE:PAVNAIND) Knows How To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Pavna Industries (NSE:PAVNAIND) looks attractive right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Pavna Industries is:

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

0.23 = ₹237m ÷ (₹2.6b - ₹1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Pavna Industries has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 15%.

See our latest analysis for Pavna Industries

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pavna Industries.

What Can We Tell From Pavna Industries' ROCE Trend?

We'd be pretty happy with returns on capital like Pavna Industries. Over the past four years, ROCE has remained relatively flat at around 23% and the business has deployed 76% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Pavna Industries has a high ratio of current liabilities to total assets of 60%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 414% return they've received over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing: We've identified 2 warning signs with Pavna Industries (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.