Returns On Capital Are A Standout For Spectrum Electrical Industries (NSE:SPECTRUM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at the ROCE trend of Spectrum Electrical Industries (NSE:SPECTRUM) we really liked what we saw.

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. Analysts use this formula to calculate it for Spectrum Electrical Industries:

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

0.20 = ₹398m ÷ (₹3.3b - ₹1.2b) (Based on the trailing twelve months to September 2024).

Thus, Spectrum Electrical Industries has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Electrical industry average of 17% it's pretty much on par.

View our latest analysis for Spectrum Electrical Industries

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Spectrum Electrical Industries.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Spectrum Electrical Industries. Over the last five years, returns on capital employed have risen substantially to 20%. 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 91%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Spectrum Electrical Industries' ROCE

To sum it up, Spectrum Electrical Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 2,601% 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 Spectrum Electrical Industries can keep these trends up, it could have a bright future ahead.

If you want to continue researching Spectrum Electrical Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.