Peria Karamalai Tea and Produce (NSE:PKTEA) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Peria Karamalai Tea and Produce's (NSE:PKTEA) returns on capital, so let's have a look.

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. The formula for this calculation on Peria Karamalai Tea and Produce is:

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

0.13 = ₹250m ÷ (₹2.0b - ₹77m) (Based on the trailing twelve months to March 2021).

Therefore, Peria Karamalai Tea and Produce has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Food industry.

See our latest analysis for Peria Karamalai Tea and Produce

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 want to delve into the historical earnings, revenue and cash flow of Peria Karamalai Tea and Produce, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Peria Karamalai Tea and Produce is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 13% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Peria Karamalai Tea and Produce is utilizing 102% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 3.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Peria Karamalai Tea and Produce's ROCE

To the delight of most shareholders, Peria Karamalai Tea and Produce has now broken into profitability. Since the stock has returned a staggering 132% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 3 warning signs for Peria Karamalai Tea and Produce you'll probably want to know about.

While Peria Karamalai Tea and Produce isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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