Returns On Capital Are A Standout For Sahaj Solar (NSE:SAHAJSOLAR)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Sahaj Solar (NSE:SAHAJSOLAR) looks great, so lets see what the trend can tell us.

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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. To calculate this metric for Sahaj Solar, this is the formula:

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

0.30 = ₹273m ÷ (₹1.5b - ₹640m) (Based on the trailing twelve months to September 2024).

Therefore, Sahaj Solar has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Machinery industry average of 16%.

View our latest analysis for Sahaj Solar

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

The Trend Of ROCE

Sahaj Solar is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 469%. 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.

One more thing to note, Sahaj Solar has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Sahaj Solar's ROCE

To sum it up, Sahaj Solar has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 21% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Sahaj Solar does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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.