Will Tarmat's (NSE:TARMAT) Growth In ROCE Persist?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Tarmat (NSE:TARMAT) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tarmat is:

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

0.075 = ₹116m ÷ (₹2.4b - ₹820m) (Based on the trailing twelve months to September 2020).

So, Tarmat has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.9%.

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'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.

So How Is Tarmat's ROCE Trending?

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 7.5% on its capital. In addition to that, Tarmat is employing 197% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

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. Since the stock has returned a solid 95% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Tarmat can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Tarmat (including 2 which are a bit unpleasant) .

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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