We Like These Underlying Return On Capital Trends At Suryalakshmi Cotton Mills (NSE:SURYALAXMI)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Suryalakshmi Cotton Mills (NSE:SURYALAXMI) looks quite promising in regards to its trends of return on capital.

We've discovered 4 warning signs about Suryalakshmi Cotton Mills. View them for free.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Suryalakshmi Cotton Mills:

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

0.093 = ₹353m ÷ (₹7.3b - ₹3.5b) (Based on the trailing twelve months to December 2024).

Thus, Suryalakshmi Cotton Mills has an ROCE of 9.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

Check out 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're interested in investigating Suryalakshmi Cotton Mills' past further, check out this free graph covering Suryalakshmi Cotton Mills' past earnings, revenue and cash flow.

What Does the ROCE Trend For Suryalakshmi Cotton Mills Tell Us?

Suryalakshmi Cotton Mills' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 2,847% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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.

On a separate but related note, it's important to know that Suryalakshmi Cotton Mills has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. 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

As discussed above, Suryalakshmi Cotton Mills appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 331% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 4 warning signs with Suryalakshmi Cotton Mills (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.