What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Dwarikesh Sugar Industries (NSE:DWARKESH) and its ROCE trend, we weren't exactly thrilled.
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 Dwarikesh Sugar Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = ₹289m ÷ (₹11b - ₹1.4b) (Based on the trailing twelve months to December 2024).
Therefore, Dwarikesh Sugar Industries has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.
View our latest analysis for Dwarikesh Sugar Industries
In the above chart we have measured Dwarikesh Sugar Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dwarikesh Sugar Industries .
What Can We Tell From Dwarikesh Sugar Industries' ROCE Trend?
When we looked at the ROCE trend at Dwarikesh Sugar Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.2% from 19% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Dwarikesh Sugar Industries has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. 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.
What We Can Learn From Dwarikesh Sugar Industries' ROCE
We're a bit apprehensive about Dwarikesh Sugar Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 172%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a separate note, we've found 1 warning sign for Dwarikesh Sugar Industries you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.