Suprajit Engineering (NSE:SUPRAJIT) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Suprajit Engineering (NSE:SUPRAJIT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Suprajit Engineering, this is the formula:

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

0.17 = ₹2.0b ÷ (₹17b - ₹5.5b) (Based on the trailing twelve months to March 2022).

Therefore, Suprajit Engineering has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.

View our latest analysis for Suprajit Engineering

In the above chart we have measured Suprajit Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Suprajit Engineering here for free.

So How Is Suprajit Engineering's ROCE Trending?

On the surface, the trend of ROCE at Suprajit Engineering doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Suprajit Engineering's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Suprajit Engineering is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 9.0% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 1 warning sign with Suprajit Engineering and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.