Investors Met With Slowing Returns on Capital At Kajaria Ceramics (NSE:KAJARIACER)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 ran our eye over Kajaria Ceramics' (NSE:KAJARIACER) trend of ROCE, we 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. To calculate this metric for Kajaria Ceramics, this is the formula:

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

0.18 = ₹4.8b ÷ (₹33b - ₹7.5b) (Based on the trailing twelve months to June 2023).

So, Kajaria Ceramics has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 16%.

Check out our latest analysis for Kajaria Ceramics

In the above chart we have measured Kajaria Ceramics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Kajaria Ceramics Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 62% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that Kajaria Ceramics has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Kajaria Ceramics' ROCE

In the end, Kajaria Ceramics has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 271% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Kajaria Ceramics you'll probably want to know about.

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.