Nahar Spinning Mills (NSE:NAHARSPING) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Nahar Spinning Mills (NSE:NAHARSPING) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nahar Spinning Mills:

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

0.035 = ₹612m ÷ (₹24b - ₹6.6b) (Based on the trailing twelve months to December 2024).

So, Nahar Spinning Mills has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for Nahar Spinning Mills

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nahar Spinning Mills.

What Does the ROCE Trend For Nahar Spinning Mills Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.5%. The amount of capital employed has increased too, by 79%. So we're very much inspired by what we're seeing at Nahar Spinning Mills thanks to its ability to profitably reinvest capital.

One more thing to note, Nahar Spinning Mills has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

All in all, it's terrific to see that Nahar Spinning Mills is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 667% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Nahar Spinning Mills can keep these trends up, it could have a bright future ahead.

Nahar Spinning Mills does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.