Harrisons Malayalam's (NSE:HARRMALAYA) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Harrisons Malayalam (NSE:HARRMALAYA) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Harrisons Malayalam, this is the formula:

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

0.028 = ₹63m ÷ (₹4.8b - ₹2.5b) (Based on the trailing twelve months to September 2024).

So, Harrisons Malayalam has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See our latest analysis for Harrisons Malayalam

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'd like to look at how Harrisons Malayalam has performed in the past in other metrics, you can view this free graph of Harrisons Malayalam's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Harrisons Malayalam is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Harrisons Malayalam is utilizing 29% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, Harrisons Malayalam has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To the delight of most shareholders, Harrisons Malayalam has now broken into profitability. Since the stock has returned a staggering 426% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Harrisons Malayalam can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Harrisons Malayalam (including 2 which are significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.