Returns At Transformers and Rectifiers (India) (NSE:TRIL) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Transformers and Rectifiers (India) (NSE:TRIL) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Transformers and Rectifiers (India):

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

0.13 = ₹570m ÷ (₹9.2b - ₹4.9b) (Based on the trailing twelve months to June 2021).

Thus, Transformers and Rectifiers (India) has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 11% generated by the Electrical industry.

View our latest analysis for Transformers and Rectifiers (India)

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

So How Is Transformers and Rectifiers (India)'s ROCE Trending?

Transformers and Rectifiers (India) is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 58% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Transformers and Rectifiers (India)'s current liabilities are still rather high at 53% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

As discussed above, Transformers and Rectifiers (India) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 4.3% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we found 3 warning signs for Transformers and Rectifiers (India) (2 are a bit concerning) you should be aware of.

While Transformers and Rectifiers (India) 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.

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.

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