Under The Bonnet, Shakti Pumps (India)'s (NSE:SHAKTIPUMP) Returns Look Impressive

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Shakti Pumps (India) (NSE:SHAKTIPUMP) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shakti Pumps (India), this is the formula:

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

0.47 = ₹4.8b ÷ (₹19b - ₹8.5b) (Based on the trailing twelve months to September 2024).

Thus, Shakti Pumps (India) has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for Shakti Pumps (India)

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 Shakti Pumps (India)'s past further, check out this free graph covering Shakti Pumps (India)'s past earnings, revenue and cash flow.

So How Is Shakti Pumps (India)'s ROCE Trending?

The trends we've noticed at Shakti Pumps (India) are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 47%. 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 203%. So we're very much inspired by what we're seeing at Shakti Pumps (India) thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Shakti Pumps (India) has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. 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.

What We Can Learn From Shakti Pumps (India)'s ROCE

To sum it up, Shakti Pumps (India) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Shakti Pumps (India) (including 1 which is significant) .

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.