Returns Are Gaining Momentum At Varroc Engineering (NSE:VARROC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Varroc Engineering (NSE:VARROC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Varroc Engineering is:

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

0.18 = ₹4.3b ÷ (₹47b - ₹24b) (Based on the trailing twelve months to September 2024).

Therefore, Varroc Engineering has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 14% it's much better.

Check out our latest analysis for Varroc Engineering

Above you can see how the current ROCE for Varroc Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Varroc Engineering .

So How Is Varroc Engineering's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Varroc Engineering. The figures show that over the last five years, returns on capital have grown by 73%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Varroc Engineering appears to been achieving more with less, since the business is using 50% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Another thing to note, Varroc Engineering has a high ratio of current liabilities to total assets of 51%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In a nutshell, we're pleased to see that Varroc Engineering has been able to generate higher returns from less capital. Considering the stock has delivered 23% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Varroc Engineering does have some risks though, and we've spotted 1 warning sign for Varroc Engineering that you might be interested in.

While Varroc Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.