Polycab India (NSE:POLYCAB) Knows How To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Polycab India's (NSE:POLYCAB) ROCE trend, we were very happy with what we saw.

Understanding 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 Polycab India:

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

0.25 = ₹23b ÷ (₹124b - ₹35b) (Based on the trailing twelve months to June 2024).

Therefore, Polycab India has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Electrical industry average of 18%.

View our latest analysis for Polycab India

Above you can see how the current ROCE for Polycab India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Polycab India .

What Does the ROCE Trend For Polycab India Tell Us?

We'd be pretty happy with returns on capital like Polycab India. The company has employed 157% more capital in the last five years, and the returns on that capital have remained stable at 25%. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Polycab India has done well to reduce current liabilities to 28% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In summary, we're delighted to see that Polycab India has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 902% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Polycab India (1 doesn't sit too well with us) you should be aware of.

Polycab India is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.