Why The 38% Return On Capital At Indian Railway Catering & Tourism (NSE:IRCTC) Should Have Your Attention

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Indian Railway Catering & Tourism (NSE:IRCTC) we really liked what we saw.

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. 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)

0.38 = ₹7.0b ÷ (₹34b - ₹15b) (Based on the trailing twelve months to December 2021).

Therefore, Indian Railway Catering & Tourism has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Indian Railway Catering & Tourism.

What Does the ROCE Trend For Indian Railway Catering & Tourism Tell Us?

Indian Railway Catering & Tourism is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 38%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Indian Railway Catering & Tourism's current liabilities are still rather high at 46% 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.

The Bottom Line

All in all, it's terrific to see that Indian Railway Catering & Tourism is reaping the rewards from prior investments and is growing its capital base. And a remarkable 109% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Indian Railway Catering & Tourism can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.