Returns Are Gaining Momentum At Bhagyanagar India (NSE:BHAGYANGR)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Bhagyanagar India (NSE:BHAGYANGR) and its trend of ROCE, we really liked what we saw.

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

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. To calculate this metric for Bhagyanagar India, this is the formula:

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

0.085 = ₹135m ÷ (₹3.0b - ₹1.4b) (Based on the trailing twelve months to March 2021).

Thus, Bhagyanagar India has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.

View our latest analysis for Bhagyanagar India

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'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 Can We Tell From Bhagyanagar India's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Bhagyanagar India. The data shows that returns on capital have increased by 262% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 43% less capital than it was five years ago. 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 47% 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 Key Takeaway

In a nutshell, we're pleased to see that Bhagyanagar India has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 5 warning signs with Bhagyanagar India (at least 3 which are a bit unpleasant) , and understanding these would certainly be useful.

While Bhagyanagar India 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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