Texmaco Rail & Engineering (NSE:TEXRAIL) Shareholders Will Want The ROCE Trajectory To Continue

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Texmaco Rail & Engineering's (NSE:TEXRAIL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Texmaco Rail & Engineering is:

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

0.069 = ₹1.0b ÷ (₹27b - ₹11b) (Based on the trailing twelve months to March 2022).

Therefore, Texmaco Rail & Engineering has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

View our latest analysis for Texmaco Rail & Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Texmaco Rail & Engineering's ROCE against it's prior returns. If you're interested in investigating Texmaco Rail & Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Texmaco Rail & Engineering Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. So we're very much inspired by what we're seeing at Texmaco Rail & Engineering thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Texmaco Rail & Engineering has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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 Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Texmaco Rail & Engineering has. And since the stock has fallen 42% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Texmaco Rail & Engineering, we've spotted 3 warning signs, and 2 of them are significant.

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.