Emkay Taps and Cutting Tools' (NSE:EMKAYTOOLS) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Emkay Taps and Cutting Tools, this is the formula:

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

0.18 = ₹403m ÷ (₹2.6b - ₹299m) (Based on the trailing twelve months to March 2023).

Therefore, Emkay Taps and Cutting Tools has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 15% generated by the Machinery industry.

View our latest analysis for Emkay Taps and Cutting Tools

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 Emkay Taps and Cutting Tools has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Emkay Taps and Cutting Tools Tell Us?

On the surface, the trend of ROCE at Emkay Taps and Cutting Tools doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 24% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Emkay Taps and Cutting Tools is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 280% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Emkay Taps and Cutting Tools that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.