I am writing today to help inform people who are new to the stock market and want to begin learning the link between Nandani Creation Limited (NSEI:NANDANI)’s return fundamentals and stock market performance.
Buying Nandani Creation makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Nandani Creation, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).Check out our latest analysis for Nandani Creation
What is Return on Capital Employed (ROCE)?
Choosing to invest in Nandani Creation comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Nandani Creation’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Nandani Creation’s ROCE for you below:
ROCE Calculation for NANDANI
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹6.50M ÷ (₹53.11M – ₹35.52M) = 36.94%
NANDANI’s 36.94% ROCE means that for every ₹100 you invest, the company creates ₹36.9. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by NANDANI and means the company creates an excellent amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound extremely well over time.
A deeper look
The encouraging ROCE is good news for Nandani Creation investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, NANDANI’s ROCE may deteriorate, in which case your money is better invested elsewhere. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that NANDANI’s ROCE has increased from 13.44%. We can see that earnings have increased from ₹24.92K to ₹6.50M whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.
NANDANI’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team. If you don’t pay attention to factors such as this you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. Nandani Creation’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Nandani Creation’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.