Return Trends At Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Emkay Taps and Cutting Tools' (NSE:EMKAYTOOLS) ROCE trend, we were pretty happy with what we saw.

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

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. The formula for this calculation on Emkay Taps and Cutting Tools is:

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

0.17 = ₹310m ÷ (₹2.0b - ₹209m) (Based on the trailing twelve months to March 2022).

Thus, Emkay Taps and Cutting Tools has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.

Check out the opportunities and risks within the IN Machinery industry.

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 want to delve into the historical earnings, revenue and cash flow of Emkay Taps and Cutting Tools, check out these free graphs here.

What Can We Tell From Emkay Taps and Cutting Tools' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 107% more capital into its operations. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

To sum it up, Emkay Taps and Cutting Tools has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 145% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 3 warning signs for Emkay Taps and Cutting Tools that we think you should be aware of.

While Emkay Taps and Cutting Tools may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.