Returns On Capital At Swaraj Engines (NSE:SWARAJENG) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. So while Swaraj Engines (NSE:SWARAJENG) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding 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 Swaraj Engines is:

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

0.33 = ₹805m ÷ (₹3.6b - ₹1.1b) (Based on the trailing twelve months to March 2020).

So, Swaraj Engines has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Machinery industry average of 11%.

See our latest analysis for Swaraj Engines

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 Swaraj Engines' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Swaraj Engines Tell Us?

Over the past five years, Swaraj Engines' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

The Bottom Line On Swaraj Engines' ROCE

In summary, Swaraj Engines isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 77% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Swaraj Engines that we think you should be aware of.

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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