Returns Are Gaining Momentum At Suzlon Energy (NSE:SUZLON)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Suzlon Energy (NSE:SUZLON) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suzlon Energy is:

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

0.17 = ₹6.3b ÷ (₹59b - ₹23b) (Based on the trailing twelve months to September 2023).

Thus, Suzlon Energy has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

Check out our latest analysis for Suzlon Energy

In the above chart we have measured Suzlon Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Suzlon Energy's ROCE Trend?

The fact that Suzlon Energy is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 17% which is a sight for sore eyes. In addition to that, Suzlon Energy is employing 22% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 38%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To the delight of most shareholders, Suzlon Energy has now broken into profitability. And a remarkable 733% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Suzlon Energy we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Suzlon Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.