Godrej Industries (NSE:GODREJIND) Has More To Do To Multiply In Value Going Forward

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Godrej Industries' (NSE:GODREJIND) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 Godrej Industries is:

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

0.11 = ₹19b ÷ (₹368b - ₹189b) (Based on the trailing twelve months to September 2022).

Therefore, Godrej Industries has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Industrials industry average of 12%.

Check out our latest analysis for Godrej Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Godrej Industries' ROCE against it's prior returns. If you're interested in investigating Godrej Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Godrej Industries Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 180% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% 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.

Another thing to note, Godrej Industries has a high ratio of current liabilities to total assets of 51%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Godrej Industries' ROCE

To sum it up, Godrej Industries has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 28%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Godrej Industries does have some risks though, and we've spotted 2 warning signs for Godrej Industries that you might be interested in.

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.

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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.