These Trends Paint A Bright Future For Nestlé India (NSE:NESTLEIND)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Nestlé India's (NSE:NESTLEIND) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nestlé India is:

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

0.48 = ₹27b ÷ (₹81b - ₹26b) (Based on the trailing twelve months to September 2020).

Therefore, Nestlé India has an ROCE of 48%. 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 Nestlé India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nestlé India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Nestlé India's ROCE Trending?

The trends we've noticed at Nestlé India are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 48%. Basically the business is earning more per dollar of capital invested and in addition to that, 20% more capital is being employed now too. So we're very much inspired by what we're seeing at Nestlé India thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 32% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Nestlé India's ROCE

All in all, it's terrific to see that Nestlé India is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Nestlé India can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Nestlé India you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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