Tantia Constructions (NSE:TANTIACONS) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Tantia Constructions' (NSE:TANTIACONS) returns on capital, so let's have a look.

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. To calculate this metric for Tantia Constructions, this is the formula:

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

0.016 = ₹44m ÷ (₹6.9b - ₹4.2b) (Based on the trailing twelve months to March 2021).

Thus, Tantia Constructions has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

Check out our latest analysis for Tantia Constructions

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'd like to look at how Tantia Constructions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Tantia Constructions has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.6% on their capital employed. Additionally, the business is utilizing 60% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Tantia Constructions could be selling under-performing assets since the ROCE is improving.

On a side note, Tantia Constructions' current liabilities are still rather high at 61% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Tantia Constructions' ROCE

In the end, Tantia Constructions has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 76% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Tantia Constructions can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Tantia Constructions, we've spotted 5 warning signs, and 1 of them is a bit unpleasant.

While Tantia Constructions may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.