The Return Trends At Bannari Amman Spinning Mills (NSE:BASML) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Bannari Amman Spinning Mills' (NSE:BASML) returns on capital, so let's have a look.

What is 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. The formula for this calculation on Bannari Amman Spinning Mills is:

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

0.20 = ₹1.4b ÷ (₹13b - ₹5.7b) (Based on the trailing twelve months to September 2021).

So, Bannari Amman Spinning Mills has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 13% generated by the Luxury industry.

Check out our latest analysis for Bannari Amman Spinning Mills

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

What Does the ROCE Trend For Bannari Amman Spinning Mills Tell Us?

The trends we've noticed at Bannari Amman Spinning Mills are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. 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 32%. So we're very much inspired by what we're seeing at Bannari Amman Spinning Mills thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Bannari Amman Spinning Mills has a current liabilities to total assets ratio of 45%, 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.

The Bottom Line On Bannari Amman Spinning Mills' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Bannari Amman Spinning Mills has. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 5 warning signs with Bannari Amman Spinning Mills (at least 3 which are significant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.