Chavda Infra (NSE:CHAVDA) Knows How To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Chavda Infra's (NSE:CHAVDA) ROCE trend, we were very happy with what we saw.

Our free stock report includes 4 warning signs investors should be aware of before investing in Chavda Infra. Read for free now.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Chavda Infra, this is the formula:

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

0.28 = ₹373m ÷ (₹2.9b - ₹1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Chavda Infra has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Construction industry average of 16%.

See our latest analysis for Chavda Infra

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Chavda Infra.

So How Is Chavda Infra's ROCE Trending?

Chavda Infra deserves to be commended in regards to it's returns. Over the past three years, ROCE has remained relatively flat at around 28% and the business has deployed 258% more capital into its operations. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Chavda Infra has a high ratio of current liabilities to total assets of 55%. 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.

The Bottom Line On Chavda Infra'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 given the stock has only risen 5.4% over the last year, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Chavda Infra (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.