Tarmat (NSE:TARMAT) Is Looking To Continue Growing Its Returns On Capital

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. 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 Tarmat's (NSE:TARMAT) returns on capital, so let's have a look.

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 Tarmat is:

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

0.038 = ₹57m ÷ (₹2.3b - ₹803m) (Based on the trailing twelve months to March 2021).

So, Tarmat has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.9%.

Check out our latest analysis for Tarmat

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tarmat's ROCE against it's prior returns. If you'd like to look at how Tarmat has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Tarmat is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.8% on its capital. Not only that, but the company is utilizing 90% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Tarmat has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Tarmat has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Tarmat's ROCE

Overall, Tarmat gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 62% 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. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with Tarmat (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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