The Trend Of High Returns At Praj Industries (NSE:PRAJIND) Has Us Very Interested

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Praj Industries' (NSE:PRAJIND) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.22 = ₹2.1b ÷ (₹23b - ₹13b) (Based on the trailing twelve months to September 2022).

So, Praj Industries has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Construction industry average of 11%.

Check out our latest analysis for Praj Industries

Above you can see how the current ROCE for Praj Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Praj Industries. The data shows that returns on capital have increased substantially over the last five years to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 37%. 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.

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 58% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Praj Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 234% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Praj Industries does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.