Why You Should Care About Roto Pumps' (NSE:ROTO) Strong Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Roto Pumps' (NSE:ROTO) trend of ROCE, we really liked what we saw.

What Is 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. The formula for this calculation on Roto Pumps is:

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

0.25 = ₹527m ÷ (₹3.0b - ₹898m) (Based on the trailing twelve months to March 2024).

Therefore, Roto Pumps has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

See our latest analysis for Roto Pumps

Historical performance is a great place to start when researching a stock so above you can see the gauge for Roto Pumps' ROCE against it's prior returns. If you're interested in investigating Roto Pumps' past further, check out this free graph covering Roto Pumps' past earnings, revenue and cash flow.

So How Is Roto Pumps' ROCE Trending?

We'd be pretty happy with returns on capital like Roto Pumps. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 170% in that time. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

Our Take On Roto Pumps' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 35% return if they held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 1 warning sign for Roto Pumps that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com