Pitti Engineering (NSE:PITTIENG) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Pitti Engineering's (NSE:PITTIENG) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Pitti Engineering:

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

0.13 = ₹408m ÷ (₹6.6b - ₹3.5b) (Based on the trailing twelve months to December 2020).

Thus, Pitti Engineering has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Electrical industry.

See our latest analysis for Pitti Engineering

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

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Pitti Engineering. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 102%. So we're very much inspired by what we're seeing at Pitti Engineering thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Pitti Engineering has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Pitti Engineering's ROCE

To sum it up, Pitti Engineering has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Pitti Engineering can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Pitti Engineering (of which 1 can't be ignored!) that you should 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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