Sarla Performance Fibers (NSE:SARLAPOLY) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sarla Performance Fibers (NSE:SARLAPOLY) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sarla Performance Fibers:

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

0.12 = ₹516m ÷ (₹6.3b - ₹1.9b) (Based on the trailing twelve months to March 2022).

Thus, Sarla Performance Fibers has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 13%.

View our latest analysis for Sarla Performance Fibers

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

What Does the ROCE Trend For Sarla Performance Fibers Tell Us?

Sarla Performance Fibers has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 45% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Sarla Performance Fibers' ROCE

To sum it up, Sarla Performance Fibers is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 19% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a separate note, we've found 2 warning signs for Sarla Performance Fibers you'll probably want to know about.

While Sarla Performance Fibers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.