Investors Will Want Bhagyanagar India's (NSE:BHAGYANGR) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, we've noticed some promising trends at Bhagyanagar India (NSE:BHAGYANGR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Bhagyanagar India:

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

0.15 = ₹214m ÷ (₹3.0b - ₹1.5b) (Based on the trailing twelve months to September 2021).

So, Bhagyanagar India has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 12% it's much better.

See our latest analysis for Bhagyanagar India

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

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Bhagyanagar India. The figures show that over the last five years, returns on capital have grown by 242%. The company is now earning ₹0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 29% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Bhagyanagar India 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, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Bhagyanagar India's ROCE

In a nutshell, we're pleased to see that Bhagyanagar India has been able to generate higher returns from less capital. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing Bhagyanagar India we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Bhagyanagar India 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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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.