Will Refex Industries (NSE:REFEX) Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Refex Industries' (NSE:REFEX) 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 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).

Thus, Refex Industries has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 6.2%.

Check out our latest analysis for Refex Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Refex Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Refex Industries, check out these free graphs here.

How Are Returns 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%. The amount of capital employed has increased too, by 1,395%. So we're very much inspired by what we're seeing at Refex Industries thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 50%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Refex Industries has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Refex Industries does come with some risks, and we've found 5 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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