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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Bhandari Hosiery Exports (NSE:BHANDARI) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Bhandari Hosiery Exports is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = ₹172m ÷ (₹2.2b - ₹932m) (Based on the trailing twelve months to September 2022).
Thus, Bhandari Hosiery Exports has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Luxury industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bhandari Hosiery Exports' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Bhandari Hosiery Exports, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Bhandari Hosiery Exports are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 14%. 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 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a separate but related note, it's important to know that Bhandari Hosiery Exports has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Bhandari Hosiery Exports' ROCE
All in all, it's terrific to see that Bhandari Hosiery Exports is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 65% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Bhandari Hosiery Exports does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.