If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over Globe Textiles (India)'s (NSE:GLOBE) 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 Globe Textiles (India):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = ₹171m ÷ (₹2.8b - ₹2.0b) (Based on the trailing twelve months to September 2022).
So, Globe Textiles (India) has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Luxury industry average of 13%.
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 Globe Textiles (India)'s past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Globe Textiles (India) deserves to be commended in regards to it's returns. The company has employed 95% more capital in the last five years, and the returns on that capital have remained stable at 21%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
Another thing to note, Globe Textiles (India) has a high ratio of current liabilities to total assets of 71%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Globe Textiles (India)'s ROCE
In short, we'd argue Globe Textiles (India) has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you'd like to know more about Globe Textiles (India), we've spotted 3 warning signs, and 2 of them can't be ignored.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.