Returns On Capital Are A Standout For Praj Industries (NSE:PRAJIND)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Praj Industries (NSE:PRAJIND) looks great, so lets see what the trend can tell us.

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 Praj Industries:

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

0.27 = ₹3.0b ÷ (₹26b - ₹15b) (Based on the trailing twelve months to June 2023).

Therefore, Praj Industries has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out our latest analysis for Praj Industries

In the above chart we have measured Praj Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Praj Industries here for free.

How Are Returns Trending?

Praj Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 27%. The amount of capital employed has increased too, by 51%. So we're very much inspired by what we're seeing at Praj Industries thanks to its ability to profitably reinvest capital.

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. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

All in all, it's terrific to see that Praj Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 558% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Praj Industries can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing Praj Industries that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.