There Are Reasons To Feel Uneasy About Rolex Rings' (NSE:ROLEXRINGS) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Rolex Rings (NSE:ROLEXRINGS), we aren't jumping out of our chairs because returns are decreasing.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Rolex Rings:

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

0.33 = ₹2.1b ÷ (₹9.9b - ₹3.4b) (Based on the trailing twelve months to June 2022).

Thus, Rolex Rings has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Machinery industry average of 14%.

View our latest analysis for Rolex Rings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Rolex Rings doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 42% where it was four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Rolex Rings has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Rolex Rings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Rolex Rings. Furthermore the stock has climbed 96% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

While Rolex Rings doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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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.