The Trend Of High Returns At Harrisons Malayalam (NSE:HARRMALAYA) Has Us Very Interested

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Harrisons Malayalam (NSE:HARRMALAYA) looks great, so lets see what the trend can tell us.

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 Harrisons Malayalam, this is the formula:

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

0.24 = ₹512m ÷ (₹4.1b - ₹1.9b) (Based on the trailing twelve months to March 2021).

So, Harrisons Malayalam has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Harrisons Malayalam

Historical performance is a great place to start when researching a stock so above you can see the gauge for Harrisons Malayalam's ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

What Can We Tell From Harrisons Malayalam's ROCE Trend?

We're delighted to see that Harrisons Malayalam is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 24% which is no doubt a relief for some early shareholders. In regards to capital employed, Harrisons Malayalam is using 37% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 48% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Harrisons Malayalam's ROCE

In a nutshell, we're pleased to see that Harrisons Malayalam has been able to generate higher returns from less capital. Since the stock has returned a staggering 171% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Harrisons Malayalam does have some risks though, and we've spotted 2 warning signs for Harrisons Malayalam that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
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