Tarmat (NSE:TARMAT) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Tarmat (NSE:TARMAT) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Tarmat, this is the formula:

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

0.074 = ₹114m ÷ (₹2.4b - ₹820m) (Based on the trailing twelve months to December 2020).

So, Tarmat has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.4% average generated by the Construction industry.

See 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're interested in investigating Tarmat's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Tarmat is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Tarmat is utilizing 197% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Tarmat's ROCE

To the delight of most shareholders, Tarmat has now broken into profitability. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Tarmat does have some risks though, and we've spotted 2 warning signs for Tarmat that you might be interested in.

While Tarmat 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. 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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