Here's What's Concerning About Dwarikesh Sugar Industries' (NSE:DWARKESH) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So while Dwarikesh Sugar Industries (NSE:DWARKESH) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. 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)

0.23 = ₹1.7b ÷ (₹14b - ₹7.0b) (Based on the trailing twelve months to June 2021).

Thus, Dwarikesh Sugar Industries has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

Check out our latest analysis for Dwarikesh Sugar Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Dwarikesh Sugar Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dwarikesh Sugar Industries Tell Us?

In terms of Dwarikesh Sugar Industries' historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 47%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Dwarikesh Sugar Industries has decreased its current liabilities to 48% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

While returns have fallen for Dwarikesh Sugar Industries in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 209% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Dwarikesh Sugar Industries, we've spotted 3 warning signs, and 1 of them is potentially serious.

Dwarikesh Sugar Industries is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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