Indo Tech Transformers (NSE:INDOTECH) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Indo Tech Transformers (NSE:INDOTECH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Indo Tech Transformers is:

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

0.10 = ₹154m ÷ (₹2.5b - ₹992m) (Based on the trailing twelve months to September 2022).

Thus, Indo Tech Transformers has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Electrical industry average it falls behind.

See our latest analysis for Indo Tech Transformers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Indo Tech Transformers' ROCE against it's prior returns. If you'd like to look at how Indo Tech Transformers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Indo Tech Transformers has broken into profitability. The company now earns 10% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

What We Can Learn From Indo Tech Transformers' ROCE

To sum it up, Indo Tech Transformers is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Indo Tech Transformers, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Indo Tech Transformers 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.

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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.