What Can The Trends At Dwarikesh Sugar Industries (NSE:DWARKESH) Tell Us About Their Returns?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Dwarikesh Sugar Industries (NSE:DWARKESH) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Dwarikesh Sugar Industries, this is the formula:

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

0.19 = ₹1.4b ÷ (₹13b - ₹5.3b) (Based on the trailing twelve months to September 2020).

Thus, Dwarikesh Sugar Industries has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

See 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 want to delve into the historical earnings, revenue and cash flow of Dwarikesh Sugar Industries, check out these free graphs here.

What Can We Tell From Dwarikesh Sugar Industries' ROCE Trend?

We're delighted to see that Dwarikesh Sugar Industries is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. And unsurprisingly, like most companies trying to break into the black, Dwarikesh Sugar Industries is utilizing 130% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 43%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On Dwarikesh Sugar Industries' ROCE

To the delight of most shareholders, Dwarikesh Sugar Industries has now broken into profitability. Since the stock has returned a staggering 237% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Dwarikesh Sugar Industries, we've discovered 4 warning signs that you should be aware of.

While Dwarikesh Sugar 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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