We Like Refex Industries' (NSE:REFEX) Returns And Here's How They're Trending

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Refex Industries' (NSE:REFEX) look very promising so lets take 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 Refex Industries:

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

0.34 = ₹487m ÷ (₹2.9b - ₹1.4b) (Based on the trailing twelve months to December 2020).

So, Refex Industries has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.

View our latest analysis for Refex Industries

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 want to delve into the historical earnings, revenue and cash flow of Refex Industries, check out these free graphs here.

So How Is Refex Industries' ROCE Trending?

Investors would be pleased with what's happening at Refex Industries. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,395% more capital is being employed now too. So we're very much inspired by what we're seeing at Refex Industries thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 50%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Refex Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

All in all, it's terrific to see that Refex Industries is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 5 warning signs with Refex Industries and understanding them should be part of your investment process.

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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