A Look Into Cera Sanitaryware's (NSE:CERA) Impressive Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Cera Sanitaryware's (NSE:CERA) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Cera Sanitaryware is:

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

0.20 = ₹2.6b ÷ (₹17b - ₹3.9b) (Based on the trailing twelve months to December 2023).

Thus, Cera Sanitaryware has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Building industry average of 17% it's pretty much on par.

View our latest analysis for Cera Sanitaryware

In the above chart we have measured Cera Sanitaryware's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cera Sanitaryware .

How Are Returns Trending?

It's hard not to be impressed by Cera Sanitaryware's returns on capital. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 20%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Cera Sanitaryware can keep this up, we'd be very optimistic about its future.

What We Can Learn From Cera Sanitaryware's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 168% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Cera Sanitaryware looks impressive, no company is worth an infinite price. The intrinsic value infographic for CERA helps visualize whether it is currently trading for a fair price.

Cera Sanitaryware 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.