Will the Promising Trends At ITD Cementation India (NSE:ITDCEM) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at ITD Cementation India (NSE:ITDCEM) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for ITD Cementation India, this is the formula:

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

0.17 = ₹2.0b ÷ (₹31b - ₹19b) (Based on the trailing twelve months to March 2020).

Thus, ITD Cementation India has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 13% it's much better.

View our latest analysis for ITD Cementation India

Above you can see how the current ROCE for ITD Cementation India compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From ITD Cementation India's ROCE Trend?

Investors would be pleased with what's happening at ITD Cementation India. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 110%. So we're very much inspired by what we're seeing at ITD Cementation India thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 63%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From ITD Cementation India's ROCE

In summary, it's great to see that ITD Cementation India 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. And since the stock has fallen 44% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

ITD Cementation India does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is potentially serious...

While ITD Cementation India 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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