Shareholders Are Optimistic That Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) Will Multiply In Value

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of Emkay Taps and Cutting Tools (NSE:EMKAYTOOLS) looks attractive right now, so lets see what the trend of returns can tell us.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.24 = ₹441m ÷ (₹2.0b - ₹209m) (Based on the trailing twelve months to March 2022).

Thus, Emkay Taps and Cutting Tools has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

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're interested in investigating Emkay Taps and Cutting Tools' past further, check out this free graph of past earnings, revenue and cash flow.

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

It's hard not to be impressed by Emkay Taps and Cutting Tools' returns on capital. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 107% more capital into its operations. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Emkay Taps and Cutting Tools can keep this up, we'd be very optimistic about its future.

The Bottom Line On Emkay Taps and Cutting Tools' ROCE

In short, we'd argue Emkay Taps and Cutting Tools has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 196% return over the last three 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.

One more thing, we've spotted 1 warning sign facing Emkay Taps and Cutting Tools that you might find interesting.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.