Suryalakshmi Cotton Mills (NSE:SURYALAXMI) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Suryalakshmi Cotton Mills (NSE:SURYALAXMI) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Suryalakshmi Cotton Mills, this is the formula:

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

0.094 = ₹359m ÷ (₹7.3b - ₹3.5b) (Based on the trailing twelve months to September 2024).

Therefore, Suryalakshmi Cotton Mills has an ROCE of 9.4%. On its own, that's a low figure but it's around the 11% average generated by the Luxury industry.

View our latest analysis for Suryalakshmi Cotton Mills

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suryalakshmi Cotton Mills' ROCE against it's prior returns. If you'd like to look at how Suryalakshmi Cotton Mills has performed in the past in other metrics, you can view this free graph of Suryalakshmi Cotton Mills' past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Suryalakshmi Cotton Mills is reaping rewards from its investments and has now broken into profitability. The company now earns 9.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Suryalakshmi Cotton Mills has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, Suryalakshmi Cotton Mills' current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Suryalakshmi Cotton Mills' ROCE

In summary, we're delighted to see that Suryalakshmi Cotton Mills has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 295% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Suryalakshmi Cotton Mills does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

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

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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.