Why You Should Care About Mallcom (India)'s (NSE:MALLCOM) Strong Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Mallcom (India)'s (NSE:MALLCOM) trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Mallcom (India), this is the formula:

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

0.23 = ₹473m ÷ (₹3.1b - ₹1.0b) (Based on the trailing twelve months to December 2022).

Thus, Mallcom (India) has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Mallcom (India)

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

What The Trend Of ROCE Can Tell Us

Mallcom (India) deserves to be commended in regards to it's returns. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 160% in that time. Now considering ROCE is an attractive 23%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Mallcom (India) can keep this up, we'd be very optimistic about its future.

On a side note, Mallcom (India) has done well to reduce current liabilities to 34% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

Mallcom (India) has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last year, the stock has only delivered a 2.3% return to shareholders who held over that period. So to determine if Mallcom (India) is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing, we've spotted 1 warning sign facing Mallcom (India) that you might find interesting.

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.