Returns Are Gaining Momentum At Servotech Power Systems (NSE:SERVOTECH)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Servotech Power Systems' (NSE:SERVOTECH) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Servotech Power Systems is:

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

0.18 = ₹168m ÷ (₹1.7b - ₹750m) (Based on the trailing twelve months to March 2023).

Thus, Servotech Power Systems has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 14% it's much better.

See our latest analysis for Servotech Power Systems

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

What Does the ROCE Trend For Servotech Power Systems Tell Us?

Servotech Power Systems is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 104%. 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.

On a side note, Servotech Power Systems' current liabilities are still rather high at 45% 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.

Our Take On Servotech Power Systems' ROCE

All in all, it's terrific to see that Servotech Power Systems is reaping the rewards from prior investments and is growing its capital base. And a remarkable 2,365% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Servotech Power Systems can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Servotech Power Systems, we've spotted 3 warning signs, and 2 of them are significant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.