Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Dalmia Bharat Sugar and Industries (NSE:DALMIASUG) 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)?

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. To calculate this metric for Dalmia Bharat Sugar and Industries, this is the formula:

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

0.12 = ₹3.1b ÷ (₹37b - ₹12b) (Based on the trailing twelve months to June 2021).

Therefore, Dalmia Bharat Sugar and Industries has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

See our latest analysis for Dalmia Bharat Sugar and Industries

In the above chart we have measured Dalmia Bharat Sugar and Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dalmia Bharat Sugar and Industries.

How Are Returns Trending?

On the surface, the trend of ROCE at Dalmia Bharat Sugar and Industries doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 12%. However it looks like Dalmia Bharat Sugar and Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Dalmia Bharat Sugar and Industries has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that Dalmia Bharat Sugar and Industries is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 335% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Dalmia Bharat Sugar and Industries, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Dalmia Bharat Sugar and 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.

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.

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