Grob Tea (NSE:GROBTEA) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Grob Tea (NSE:GROBTEA) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Grob Tea:

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

0.34 = ₹288m ÷ (₹1.1b - ₹238m) (Based on the trailing twelve months to December 2020).

Therefore, Grob Tea has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

See our latest analysis for Grob Tea

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grob Tea's ROCE against it's prior returns. If you'd like to look at how Grob Tea has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Grob Tea's ROCE Trending?

Grob Tea is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 34%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 90%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Grob Tea has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To sum it up, Grob Tea has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 32% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for Grob Tea you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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