We Like These Underlying Return On Capital Trends At Indo Rama Synthetics (India) (NSE:INDORAMA)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Indo Rama Synthetics (India) (NSE:INDORAMA) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.13 = ₹1.2b ÷ (₹23b - ₹13b) (Based on the trailing twelve months to December 2022).

Therefore, Indo Rama Synthetics (India) has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 12%.

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.

How Are Returns Trending?

Indo Rama Synthetics (India) has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. Not only that, but the company is utilizing 70% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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 59%, 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.

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

In summary, it's great to see that Indo Rama Synthetics (India) has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 30% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Indo Rama Synthetics (India) does come with some risks, and we've found 3 warning signs that you should be aware of.

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.