If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Nahar Spinning Mills (NSE:NAHARSPING) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. 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)
0.29 = ₹5.3b ÷ (₹22b - ₹3.9b) (Based on the trailing twelve months to September 2022).
Therefore, Nahar Spinning Mills has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Nahar Spinning Mills' ROCE against it's prior returns. If you're interested in investigating Nahar Spinning Mills' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Nahar Spinning Mills is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 29% on its capital. And unsurprisingly, like most companies trying to break into the black, Nahar Spinning Mills is utilizing 91% more capital than it was five years ago. 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.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Nahar Spinning Mills' ROCE
Long story short, we're delighted to see that Nahar Spinning Mills' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Nahar Spinning Mills does have some risks though, and we've spotted 1 warning sign for Nahar Spinning Mills that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.