SPL Industries' (NSE:SPLIL) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SPL Industries' (NSE:SPLIL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 SPL Industries:

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

0.14 = ₹253m ÷ (₹2.1b - ₹332m) (Based on the trailing twelve months to September 2022).

So, SPL Industries has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Luxury industry.

See our latest analysis for SPL Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for SPL Industries' ROCE against it's prior returns. If you're interested in investigating SPL Industries' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that SPL Industries is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. And unsurprisingly, like most companies trying to break into the black, SPL Industries is utilizing 201% more capital than it was five 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.

One more thing to note, SPL Industries has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On SPL Industries' ROCE

Long story short, we're delighted to see that SPL Industries' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 302% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for SPL Industries (of which 2 shouldn't be ignored!) that you should know about.

While SPL Industries 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.