A Look Into Donear Industries' (NSE:DONEAR) Impressive Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Donear Industries' (NSE:DONEAR) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Donear Industries, this is the formula:

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

0.30 = ₹807m ÷ (₹8.0b - ₹5.3b) (Based on the trailing twelve months to September 2024).

So, Donear Industries has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Luxury industry average of 11%.

Check out our latest analysis for Donear Industries

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

What Can We Tell From Donear Industries' ROCE Trend?

We'd be pretty happy with returns on capital like Donear Industries. Over the past five years, ROCE has remained relatively flat at around 30% and the business has deployed 92% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Donear Industries can keep this up, we'd be very optimistic about its future.

Another thing to note, Donear Industries has a high ratio of current liabilities to total assets of 66%. 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 Key Takeaway

In summary, we're delighted to see that Donear Industries has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 287% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing Donear Industries we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

Donear Industries is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.