Can Indo National (NSE:NIPPOBATRY) Continue To Grow Its 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Indo National (NSE:NIPPOBATRY) looks quite promising in regards to its trends of return on capital.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Indo National:

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

0.15 = ₹481m ÷ (₹5.2b - ₹2.1b) (Based on the trailing twelve months to September 2020).

Thus, Indo National has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Electrical industry.

View our latest analysis for Indo National

Historical performance is a great place to start when researching a stock so above you can see the gauge for Indo National's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Indo National, check out these free graphs here.

What Does the ROCE Trend For Indo National Tell Us?

Indo National is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 66%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Indo National's ROCE

To sum it up, Indo National has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 34% 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.

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

While Indo National 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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