Under The Bonnet, Indo Rama Synthetics (India)'s (NSE:INDORAMA) Returns Look Impressive

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we're seeing at Indo Rama Synthetics (India)'s (NSE:INDORAMA) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Indo Rama Synthetics (India) is:

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

0.39 = ₹2.4b ÷ (₹18b - ₹12b) (Based on the trailing twelve months to December 2021).

Therefore, Indo Rama Synthetics (India) has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Luxury industry average of 14%.

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

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 Indo Rama Synthetics (India)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Indo Rama Synthetics (India)'s ROCE Trend?

Shareholders will be relieved that Indo Rama Synthetics (India) has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 39%, which is always encouraging. 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. Because in the end, a business can only get so efficient.

On a side note, Indo Rama Synthetics (India)'s current liabilities are still rather high at 66% 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.

The Bottom Line On Indo Rama Synthetics (India)'s ROCE

To sum it up, Indo Rama Synthetics (India) is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Indo Rama Synthetics (India) can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Indo Rama Synthetics (India) (including 1 which can't be ignored) .

Indo Rama Synthetics (India) 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.

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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.