DCM Shriram Industries (NSE:DCMSRIND) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at DCM Shriram Industries (NSE:DCMSRIND) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on DCM Shriram Industries is:

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

0.19 = ₹1.9b ÷ (₹22b - ₹12b) (Based on the trailing twelve months to June 2024).

So, DCM Shriram Industries has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 13% it's much better.

View our latest analysis for DCM Shriram Industries

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

What Can We Tell From DCM Shriram Industries' ROCE Trend?

DCM Shriram Industries is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 62%. So we're very much inspired by what we're seeing at DCM Shriram Industries thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that DCM Shriram Industries has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, DCM Shriram Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing DCM Shriram Industries we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While DCM Shriram Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.