Dwarikesh Sugar Industries (NSE:DWARKESH) Knows How To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Dwarikesh Sugar Industries (NSE:DWARKESH), we 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. Analysts use this formula to calculate it for Dwarikesh Sugar Industries:

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

0.21 = ₹1.6b ÷ (₹14b - ₹7.0b) (Based on the trailing twelve months to March 2021).

Therefore, Dwarikesh Sugar Industries has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out our latest analysis for Dwarikesh Sugar Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dwarikesh Sugar Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Dwarikesh Sugar Industries, check out these free graphs here.

How Are Returns Trending?

In terms of Dwarikesh Sugar Industries' history of ROCE, it's quite impressive. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 105% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Dwarikesh Sugar Industries can keep this up, we'd be very optimistic about its future.

On a side note, Dwarikesh Sugar Industries has done well to reduce current liabilities to 48% of total assets over the last five years. 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. Although because current liabilities are still 48%, some of that risk is still prevalent.

The Bottom Line

In short, we'd argue Dwarikesh Sugar Industries has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 227% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing: We've identified 4 warning signs with Dwarikesh Sugar Industries (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

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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