We Like These Underlying Return On Capital Trends At K.C.P. Sugar and Industries (NSE:KCPSUGIND)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in K.C.P. Sugar and Industries' (NSE:KCPSUGIND) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for K.C.P. Sugar and Industries:

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

0.082 = ₹352m ÷ (₹6.3b - ₹2.0b) (Based on the trailing twelve months to June 2023).

Thus, K.C.P. Sugar and Industries has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

View our latest analysis for K.C.P. Sugar and Industries

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

What Can We Tell From K.C.P. Sugar and Industries' ROCE Trend?

K.C.P. Sugar and Industries has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.2% on its capital. Not only that, but the company is utilizing 30% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 31%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On K.C.P. Sugar and Industries' ROCE

In summary, it's great to see that K.C.P. Sugar and Industries has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

K.C.P. Sugar and Industries does have some risks though, and we've spotted 2 warning signs for K.C.P. Sugar and Industries that you might be interested in.

While K.C.P. Sugar and 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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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.