Returns On Capital Are Showing Encouraging Signs At Raj Rayon Industries (NSE:RAJRILTD)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Raj Rayon Industries (NSE:RAJRILTD) looks quite promising in regards to its trends of return on capital.

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 Raj Rayon Industries:

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

0.078 = ₹165m ÷ (₹4.2b - ₹2.1b) (Based on the trailing twelve months to June 2024).

Therefore, Raj Rayon Industries has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for Raj Rayon Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Raj Rayon Industries' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Raj Rayon Industries.

What Does the ROCE Trend For Raj Rayon Industries Tell Us?

We're delighted to see that Raj Rayon Industries is reaping rewards from its investments and is now generating some pre-tax profits. About two years ago the company was generating losses but things have turned around because it's now earning 7.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Raj Rayon Industries is utilizing 110% more capital than it was two years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was two years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Raj Rayon Industries' ROCE

Long story short, we're delighted to see that Raj Rayon Industries' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 20% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Raj Rayon Industries does have some risks though, and we've spotted 1 warning sign for Raj Rayon Industries that you might be interested in.

While Raj Rayon Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.