Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Emkay Taps and Cutting Tools:

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

0.20 = ₹293m ÷ (₹1.6b - ₹122m) (Based on the trailing twelve months to March 2021).

Thus, Emkay Taps and Cutting Tools has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 14% it's much better.

See our latest analysis for Emkay Taps and Cutting Tools

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emkay Taps and Cutting Tools' ROCE against it's prior returns. 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 Can We Tell From Emkay Taps and Cutting Tools' ROCE Trend?

In terms of Emkay Taps and Cutting Tools' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 20% from 26% 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.

In Conclusion...

While returns have fallen for Emkay Taps and Cutting Tools in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Emkay Taps and Cutting Tools, we've discovered 1 warning sign 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.

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.

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