Returns At Ambika Cotton Mills (NSE:AMBIKCO) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Ambika Cotton Mills (NSE:AMBIKCO) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Ambika Cotton Mills, this is the formula:

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

0.097 = ₹897m ÷ (₹11b - ₹1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Ambika Cotton Mills has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Luxury industry average of 11%.

View our latest analysis for Ambika Cotton Mills

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ambika Cotton Mills' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ambika Cotton Mills.

What Does the ROCE Trend For Ambika Cotton Mills Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 74%. So we're very much inspired by what we're seeing at Ambika Cotton Mills thanks to its ability to profitably reinvest capital.

What We Can Learn From Ambika Cotton Mills' ROCE

All in all, it's terrific to see that Ambika Cotton Mills is reaping the rewards from prior investments and is growing its capital base. And a remarkable 121% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 2 warning signs we've spotted with Ambika Cotton Mills (including 1 which is significant) .

While Ambika Cotton Mills isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.