Butterfly Gandhimathi Appliances (NSE:BUTTERFLY) Knows How To Allocate Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Butterfly Gandhimathi Appliances' (NSE:BUTTERFLY) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Butterfly Gandhimathi Appliances is:

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

0.27 = ₹727m ÷ (₹6.3b - ₹3.5b) (Based on the trailing twelve months to December 2021).

So, Butterfly Gandhimathi Appliances has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

Check out our latest analysis for Butterfly Gandhimathi Appliances

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Butterfly Gandhimathi Appliances' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Butterfly Gandhimathi Appliances' ROCE Trend?

Shareholders will be relieved that Butterfly Gandhimathi Appliances has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 27% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In summary, we're delighted to see that Butterfly Gandhimathi Appliances has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 654% total return over the last five years 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 Butterfly Gandhimathi Appliances can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Butterfly Gandhimathi Appliances that we think you should be aware of.

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.