GHCL Textiles' (NSE:GHCLTEXTIL) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at GHCL Textiles (NSE:GHCLTEXTIL) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for GHCL Textiles:

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

0.027 = ₹419m ÷ (₹16b - ₹894m) (Based on the trailing twelve months to March 2024).

Thus, GHCL Textiles has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for GHCL Textiles

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

The Trend Of ROCE

The fact that GHCL Textiles is now generating some pre-tax profits from its prior investments is very encouraging. About three years ago the company was generating losses but things have turned around because it's now earning 2.7% on its capital. In addition to that, GHCL Textiles is employing 36,881,307% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, GHCL Textiles has decreased current liabilities to 5.5% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

In summary, it's great to see that GHCL Textiles has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 28% to shareholders over the last year, 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.

One more thing, we've spotted 2 warning signs facing GHCL Textiles that you might find interesting.

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.