Under The Bonnet, Varroc Engineering's (NSE:VARROC) Returns Look Impressive

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, the ROCE of Varroc Engineering (NSE:VARROC) looks great, so lets see what the trend can tell us.

We've discovered 3 warning signs about Varroc Engineering. View them for free.

Understanding 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 Varroc Engineering:

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

0.20 = ₹4.6b ÷ (₹47b - ₹24b) (Based on the trailing twelve months to December 2024).

Thus, Varroc Engineering has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See our latest analysis for Varroc Engineering

In the above chart we have measured Varroc 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 Varroc Engineering for free.

What Can We Tell From Varroc Engineering's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Varroc Engineering. We found that the returns on capital employed over the last five years have risen by 113%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. 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. Varroc Engineering may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, Varroc Engineering's current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Varroc Engineering's ROCE

From what we've seen above, Varroc Engineering has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 3 warning signs we've spotted with Varroc Engineering (including 1 which shouldn't be ignored) .

Varroc Engineering is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.