Thermax (NSE:THERMAX) Has Some Way To Go To Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Thermax's (NSE:THERMAX) ROCE trend, we were pretty happy with what we saw.

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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. Analysts use this formula to calculate it for Thermax:

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

0.13 = ₹7.7b ÷ (₹110b - ₹49b) (Based on the trailing twelve months to December 2024).

Thus, Thermax has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Machinery industry average it falls behind.

Check out our latest analysis for Thermax

In the above chart we have measured Thermax's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Thermax for free.

So How Is Thermax's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 95% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Thermax has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Thermax has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Thermax's ROCE

To sum it up, Thermax has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 366% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing Thermax, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.