The Return Trends At Transformers and Rectifiers (India) (NSE:TRIL) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Transformers and Rectifiers (India) (NSE:TRIL) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Transformers and Rectifiers (India), this is the formula:

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

0.11 = ₹436m ÷ (₹8.8b - ₹4.8b) (Based on the trailing twelve months to December 2020).

So, Transformers and Rectifiers (India) has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for Transformers and Rectifiers (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Transformers and Rectifiers (India), check out these free graphs here.

What Can We Tell From Transformers and Rectifiers (India)'s ROCE Trend?

Transformers and Rectifiers (India) has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 117% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Transformers and Rectifiers (India) has a current liabilities to total assets ratio of 54%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're delighted to see that Transformers and Rectifiers (India) has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Transformers and Rectifiers (India) does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

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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