A Look Into Kaveri Seed's (NSE:KSCL) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Ergo, when we looked at the ROCE trends at Kaveri Seed (NSE:KSCL), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Kaveri Seed:

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

0.21 = ₹2.8b ÷ (₹19b - ₹6.3b) (Based on the trailing twelve months to December 2020).

So, Kaveri Seed has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

See our latest analysis for Kaveri Seed

Above you can see how the current ROCE for Kaveri Seed compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We'd be pretty happy with returns on capital like Kaveri Seed. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 43% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than21% because total capital employed would be higher.The 21% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Kaveri Seed's ROCE

In summary, we're delighted to see that Kaveri Seed has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 34% return to shareholders who held over that period. So to determine if Kaveri Seed is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we've found 1 warning sign for Kaveri Seed that we think you should be aware of.

Kaveri Seed is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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