Returns At Sharp Chucks and Machines (NSE:SCML) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Sharp Chucks and Machines' (NSE:SCML) ROCE trend, we were pretty happy with what we saw.

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

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. To calculate this metric for Sharp Chucks and Machines, this is the formula:

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

0.19 = ₹212m ÷ (₹2.3b - ₹1.2b) (Based on the trailing twelve months to September 2024).

Therefore, Sharp Chucks and Machines has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 16%.

View our latest analysis for Sharp Chucks and Machines

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're interested in investigating Sharp Chucks and Machines' past further, check out this free graph covering Sharp Chucks and Machines' past earnings, revenue and cash flow.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 107% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Sharp Chucks and Machines has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Sharp Chucks and Machines has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. 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.

What We Can Learn From Sharp Chucks and Machines' ROCE

To sum it up, Sharp Chucks and Machines has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 3 warning signs for Sharp Chucks and Machines (2 are a bit unpleasant) you should be aware of.

While Sharp Chucks and Machines may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.