Why You Should Care About Salzer Electronics' (NSE:SALZERELEC) Strong 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. With that in mind, the ROCE of Salzer Electronics (NSE:SALZERELEC) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Salzer Electronics is:

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

0.20 = ₹1.0b ÷ (₹9.9b - ₹4.7b) (Based on the trailing twelve months to June 2024).

Thus, Salzer Electronics has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Electrical industry average of 18% it's pretty much on par.

Check out our latest analysis for Salzer Electronics

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'd like to look at how Salzer Electronics has performed in the past in other metrics, you can view this free graph of Salzer Electronics' past earnings, revenue and cash flow.

What Can We Tell From Salzer Electronics' ROCE Trend?

Salzer Electronics deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 68% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Salzer Electronics' current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In short, we'd argue Salzer Electronics has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 895% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing: We've identified 2 warning signs with Salzer Electronics (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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.