Investors Shouldn't Overlook The Favourable Returns On Capital At Likhitha Infrastructure (NSE:LIKHITHA)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Likhitha Infrastructure (NSE:LIKHITHA), we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Likhitha Infrastructure:

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

0.33 = ₹564m ÷ (₹1.9b - ₹195m) (Based on the trailing twelve months to December 2021).

Thus, Likhitha Infrastructure has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 16%.

See our latest analysis for Likhitha Infrastructure

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

The Trend Of ROCE

In terms of Likhitha Infrastructure's history of ROCE, it's quite impressive. The company has consistently earned 33% for the last four years, and the capital employed within the business has risen 456% in that time. Now considering ROCE is an attractive 33%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Likhitha Infrastructure can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 10% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In short, we'd argue Likhitha Infrastructure has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Likhitha Infrastructure you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.