Cochin Shipyard's (NSE:COCHINSHIP) Returns On Capital Are Heading Higher

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Cochin Shipyard (NSE:COCHINSHIP) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Cochin Shipyard, this is the formula:

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

0.14 = ₹6.9b ÷ (₹82b - ₹31b) (Based on the trailing twelve months to September 2022).

So, Cochin Shipyard has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 16% generated by the Machinery industry.

Check out our latest analysis for Cochin Shipyard

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cochin Shipyard's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Cochin Shipyard, check out these free graphs here.

What Can We Tell From Cochin Shipyard's ROCE Trend?

The trends we've noticed at Cochin Shipyard are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 58%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Cochin Shipyard's ROCE

All in all, it's terrific to see that Cochin Shipyard is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 13% to shareholders. So with that in mind, we think the stock deserves further research.

Like most companies, Cochin Shipyard does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.