Why The 20% Return On Capital At Servotech Power Systems (NSE:SERVOTECH) Should Have Your Attention

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Servotech Power Systems' (NSE:SERVOTECH) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Servotech Power Systems:

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

0.20 = ₹215m ÷ (₹1.7b - ₹645m) (Based on the trailing twelve months to December 2023).

Therefore, Servotech Power Systems 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.

View our latest analysis for Servotech Power Systems

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 Servotech Power Systems' past further, check out this free graph covering Servotech Power Systems' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Servotech Power Systems are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 136% more capital is being employed now too. So we're very much inspired by what we're seeing at Servotech Power Systems thanks to its ability to profitably reinvest capital.

The Bottom Line

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Servotech Power Systems does have some risks though, and we've spotted 2 warning signs for Servotech Power Systems that you might be interested in.

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.