Indo Rama Synthetics (India) (NSE:INDORAMA) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Indo Rama Synthetics (India) (NSE:INDORAMA) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Indo Rama Synthetics (India):

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

0.13 = ₹802m ÷ (₹17b - ₹11b) (Based on the trailing twelve months to March 2021).

So, Indo Rama Synthetics (India) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 9.9% it's much better.

Check out our latest analysis for Indo Rama Synthetics (India)

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

What The Trend Of ROCE Can Tell Us

Indo Rama Synthetics (India) is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 619% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Indo Rama Synthetics (India)'s current liabilities are still rather high at 64% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Indo Rama Synthetics (India)'s ROCE

To bring it all together, Indo Rama Synthetics (India) has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Indo Rama Synthetics (India) does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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