Returns On Capital At K.M. Sugar Mills (NSE:KMSUGAR) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So while K.M. Sugar Mills (NSE:KMSUGAR) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding 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 K.M. Sugar Mills:

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

0.20 = ₹578m ÷ (₹6.4b - ₹3.5b) (Based on the trailing twelve months to March 2022).

So, K.M. Sugar Mills has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

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're interested in investigating K.M. Sugar Mills' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of K.M. Sugar Mills' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 27% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, K.M. Sugar Mills has done well to pay down its current liabilities to 55% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 55% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

To conclude, we've found that K.M. Sugar Mills is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 4 warning signs we've spotted with K.M. Sugar Mills (including 1 which is a bit concerning) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.