Likhitha Infrastructure (NSE:LIKHITHA) Looks To Prolong Its Impressive Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Likhitha Infrastructure's (NSE:LIKHITHA) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Likhitha Infrastructure, this is the formula:

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

0.32 = ₹794m ÷ (₹3.0b - ₹446m) (Based on the trailing twelve months to June 2023).

Thus, Likhitha Infrastructure has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 3.8% earned by companies in a similar industry.

View 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're interested in investigating Likhitha Infrastructure's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Likhitha Infrastructure's ROCE Trending?

We'd be pretty happy with returns on capital like Likhitha Infrastructure. The company has consistently earned 32% for the last five years, and the capital employed within the business has risen 596% in that time. Now considering ROCE is an attractive 32%, 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 five years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

Likhitha Infrastructure has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 91% to shareholders over the last year. 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 final note, we've found 1 warning sign for Likhitha Infrastructure that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.