Investors Could Be Concerned With Dwarikesh Sugar Industries' (NSE:DWARKESH) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, while the ROCE is currently high for Dwarikesh Sugar Industries (NSE:DWARKESH), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

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)

0.27 = ₹2.5b ÷ (₹14b - ₹5.2b) (Based on the trailing twelve months to March 2022).

So, Dwarikesh Sugar Industries has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

View 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.

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. Historically returns on capital were even higher at 58%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Dwarikesh Sugar Industries has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Dwarikesh Sugar Industries' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 170% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Dwarikesh Sugar Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.