K.M. Sugar Mills (NSE:KMSUGAR) Has More To Do To Multiply In Value Going Forward

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at K.M. Sugar Mills (NSE:KMSUGAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for K.M. Sugar Mills:

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

0.096 = ₹331m ÷ (₹4.6b - ₹1.1b) (Based on the trailing twelve months to December 2023).

So, K.M. Sugar Mills has an ROCE of 9.6%. Ultimately, that's a low return and it under-performs the Food industry average of 15%.

View our latest analysis for K.M. Sugar Mills

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

How Are Returns Trending?

The returns on capital haven't changed much for K.M. Sugar Mills in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 215% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, K.M. Sugar Mills has done well to reduce current liabilities to 25% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

As we've seen above, K.M. Sugar Mills' returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 317% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

K.M. Sugar Mills does have some risks though, and we've spotted 3 warning signs for K.M. Sugar Mills that you might be interested in.

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.