Investors Will Want Sapphire Foods India's (NSE:SAPPHIRE) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sapphire Foods India's (NSE:SAPPHIRE) returns on capital, so let's have a look.

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 Sapphire Foods India, this is the formula:

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

0.075 = ₹1.6b ÷ (₹27b - ₹5.0b) (Based on the trailing twelve months to September 2023).

Thus, Sapphire Foods India has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.

Check out our latest analysis for Sapphire Foods India

Above you can see how the current ROCE for Sapphire Foods India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sapphire Foods India.

So How Is Sapphire Foods India's ROCE Trending?

We're delighted to see that Sapphire Foods India is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Sapphire Foods India is utilizing 192% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Sapphire Foods India has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Sapphire Foods India has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Sapphire Foods India's ROCE

Long story short, we're delighted to see that Sapphire Foods India's reinvestment activities have paid off and the company is now profitable. And with a respectable 9.4% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Sapphire Foods India does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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.