Returns Are Gaining Momentum At Kothari Sugars and Chemicals (NSE:KOTARISUG)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Kothari Sugars and Chemicals' (NSE:KOTARISUG) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kothari Sugars and Chemicals:

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

0.16 = ₹438m ÷ (₹4.0b - ₹1.2b) (Based on the trailing twelve months to December 2022).

Thus, Kothari Sugars and Chemicals has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

Check out our latest analysis for Kothari Sugars and Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kothari Sugars and Chemicals' ROCE against it's prior returns. If you're interested in investigating Kothari Sugars and Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Kothari Sugars and Chemicals. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at Kothari Sugars and Chemicals thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Kothari Sugars and Chemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kothari Sugars and Chemicals has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 3 warning signs with Kothari Sugars and Chemicals and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.