Tantia Constructions' (NSE:TANTIACONS) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Tantia Constructions (NSE:TANTIACONS) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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).

Therefore, Tantia Constructions has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

Check out our latest analysis for Tantia Constructions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tantia Constructions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tantia Constructions, check out these free graphs here.

What Can We Tell From Tantia Constructions' ROCE Trend?

We're delighted to see that Tantia Constructions is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 1.6% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 60%. This could potentially mean that the company is selling some of its assets.

Another thing to note, Tantia Constructions has a high ratio of current liabilities to total assets of 61%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In a nutshell, we're pleased to see that Tantia Constructions has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Tantia Constructions, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

While Tantia Constructions 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.