Some Investors May Be Worried About GRM Overseas' (NSE:GRMOVER) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at GRM Overseas (NSE:GRMOVER), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on GRM Overseas is:

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

0.18 = ₹713m ÷ (₹6.6b - ₹2.6b) (Based on the trailing twelve months to September 2024).

Therefore, GRM Overseas has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

View our latest analysis for GRM Overseas

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

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 52% five years ago, while capital employed has grown 485%. Usually this isn't ideal, but given GRM Overseas conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence GRM Overseas might not have received a full period of earnings contribution from it. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

On a side note, GRM Overseas has done well to pay down its current liabilities to 40% 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.

The Bottom Line On GRM Overseas' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that GRM Overseas is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 13% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 1 warning sign for GRM Overseas you'll probably want to know about.

While GRM Overseas 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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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.