Stock Analysis

Niraj Cement Structurals (NSE:NIRAJ) Is Looking To Continue Growing Its Returns On Capital

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There are a few key trends to look for if we want to identify the next 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. So when we looked at Niraj Cement Structurals (NSE:NIRAJ) and its trend of ROCE, we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Niraj Cement Structurals:

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

0.021 = ₹40m ÷ (₹3.6b - ₹1.7b) (Based on the trailing twelve months to December 2022).

Thus, Niraj Cement Structurals has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.

View our latest analysis for Niraj Cement Structurals

NSEI:NIRAJ Return on Capital Employed March 17th 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Niraj Cement Structurals' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Niraj Cement Structurals' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, returns on capital have grown by 281%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Niraj Cement Structurals appears to been achieving more with less, since the business is using 25% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 47% of the business, which is more than it was five years ago. 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.

Our Take On Niraj Cement Structurals' ROCE

From what we've seen above, Niraj Cement Structurals has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 11% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for Niraj Cement Structurals 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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Find out whether Niraj Cement Structurals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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