Why You Should Care About Emkay Taps and Cutting Tools' (NSE:EMKAYTOOLS) Strong Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Emkay Taps and Cutting Tools' (NSE:EMKAYTOOLS) trend of ROCE, we really liked what we saw.

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. 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 = ₹396m ÷ (₹2.2b - ₹220m) (Based on the trailing twelve months to September 2022).

So, Emkay Taps and Cutting Tools has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

View 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?

We'd be pretty happy with returns on capital like Emkay Taps and Cutting Tools. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 108% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take 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 265% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Emkay Taps and Cutting Tools, you might be interested to know about the 3 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.