Some Investors May Be Worried About Deep Industries' (NSE:DEEPINDS) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Deep Industries (NSE:DEEPINDS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Deep Industries, this is the formula:

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

0.074 = ₹1.3b ÷ (₹19b - ₹2.2b) (Based on the trailing twelve months to March 2024).

So, Deep Industries has an ROCE of 7.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.9%.

See our latest analysis for Deep Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Deep Industries.

So How Is Deep Industries' ROCE Trending?

On the surface, the trend of ROCE at Deep Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.4% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Deep Industries' ROCE

While returns have fallen for Deep Industries in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 615% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Deep Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Deep Industries 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.