Tarmat's (NSE:TARMAT) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Tarmat:

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

0.043 = ₹55m ÷ (₹2.1b - ₹818m) (Based on the trailing twelve months to September 2022).

So, Tarmat has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.

View 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 want to delve into the historical earnings, revenue and cash flow of Tarmat, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

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 4.3% which is a sight for sore eyes. Not only that, but the company is utilizing 34% more capital than before, but that's to be expected from a company trying to break into profitability. 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 39% 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.

The Bottom Line On Tarmat's ROCE

Long story short, we're delighted to see that Tarmat's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 3 warning signs with Tarmat and understanding these should be part of your investment process.

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.