Investors Should Be Encouraged By Grindwell Norton's (NSE:GRINDWELL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Grindwell Norton's (NSE:GRINDWELL) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Grindwell Norton:

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

0.24 = ₹4.1b ÷ (₹22b - ₹5.5b) (Based on the trailing twelve months to September 2022).

Thus, Grindwell Norton has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Our analysis indicates that GRINDWELL is potentially overvalued!

In the above chart we have measured Grindwell Norton's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grindwell Norton.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Grindwell Norton. The data shows that returns on capital have increased substantially over the last five years to 24%. The amount of capital employed has increased too, by 75%. So we're very much inspired by what we're seeing at Grindwell Norton thanks to its ability to profitably reinvest capital.

Our Take On Grindwell Norton's ROCE

In summary, it's great to see that Grindwell Norton can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 285% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Grindwell Norton (of which 1 shouldn't be ignored!) that you should know about.

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.