Shareholders Would Enjoy A Repeat Of Indo Rama Synthetics (India)'s (NSE:INDORAMA) Recent Growth In Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Indo Rama Synthetics (India) (NSE:INDORAMA) we really liked what we saw.

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)

0.30 = ₹1.9b ÷ (₹18b - ₹12b) (Based on the trailing twelve months to September 2021).

So, Indo Rama Synthetics (India) has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Luxury industry average of 13%.

See 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 Does the ROCE Trend For Indo Rama Synthetics (India) Tell Us?

Shareholders will be relieved that Indo Rama Synthetics (India) has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 30% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Indo Rama Synthetics (India) has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. 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.

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

In summary, we're delighted to see that Indo Rama Synthetics (India) has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for Indo Rama Synthetics (India) you'll probably want to know about.

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.