Indian Railway Catering & Tourism (NSE:IRCTC) Is Achieving High Returns On Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Indian Railway Catering & Tourism's (NSE:IRCTC) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Indian Railway Catering & Tourism, this is the formula:

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

0.42 = ₹14b ÷ (₹61b - ₹26b) (Based on the trailing twelve months to June 2024).

Thus, Indian Railway Catering & Tourism has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 16%.

View our latest analysis for Indian Railway Catering & Tourism

In the above chart we have measured Indian Railway Catering & Tourism's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Indian Railway Catering & Tourism .

What Can We Tell From Indian Railway Catering & Tourism's ROCE Trend?

Indian Railway Catering & Tourism is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 42%. The amount of capital employed has increased too, by 204%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 43%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Indian Railway Catering & Tourism has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Indian Railway Catering & Tourism's ROCE

To sum it up, Indian Railway Catering & Tourism has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 488% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.