What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shiva Texyarn (NSE:SHIVATEX) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Shiva Texyarn, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₹320m ÷ (₹3.1b - ₹1.1b) (Based on the trailing twelve months to June 2021).
Therefore, Shiva Texyarn has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 12% it's much better.
See our latest analysis for Shiva Texyarn
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shiva Texyarn's ROCE against it's prior returns. If you're interested in investigating Shiva Texyarn's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at Shiva Texyarn. We found that the returns on capital employed over the last five years have risen by 26%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 30% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Shiva Texyarn may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
From what we've seen above, Shiva Texyarn has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 12% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One final note, you should learn about the 5 warning signs we've spotted with Shiva Texyarn (including 2 which are a bit unpleasant) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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About NSEI:SHIVATEX
Shiva Texyarn
Manufactures and sells cotton yarn, coated and laminated fabrics, home textiles, and other value-added textile products in India and internationally.
Moderate with mediocre balance sheet.
