Investors Should Be Encouraged By Shakti Pumps (India)'s (NSE:SHAKTIPUMP) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Shakti Pumps (India)'s (NSE:SHAKTIPUMP) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shakti Pumps (India) is:

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

0.44 = ₹3.4b ÷ (₹15b - ₹6.8b) (Based on the trailing twelve months to June 2024).

So, Shakti Pumps (India) has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Machinery industry average of 17%.

View our latest analysis for Shakti Pumps (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shakti Pumps (India)'s ROCE against it's prior returns. If you'd like to look at how Shakti Pumps (India) has performed in the past in other metrics, you can view this free graph of Shakti Pumps (India)'s past earnings, revenue and cash flow.

How Are Returns Trending?

We like the trends that we're seeing from Shakti Pumps (India). The data shows that returns on capital have increased substantially over the last five years to 44%. Basically the business is earning more per dollar of capital invested and in addition to that, 133% more capital is being employed now too. 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, Shakti Pumps (India)'s current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shakti Pumps (India) has. And a remarkable 1,270% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Shakti Pumps (India) does have some risks though, and we've spotted 1 warning sign for Shakti Pumps (India) that you might be interested in.

Shakti Pumps (India) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.