Ponni Sugars (Erode) (NSE:PONNIERODE) Is Reinvesting At Lower Rates Of Return

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ponni Sugars (Erode) (NSE:PONNIERODE), we don't think it's current trends fit the mold of a multi-bagger.

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 Ponni Sugars (Erode):

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

0.059 = ₹285m ÷ (₹5.3b - ₹466m) (Based on the trailing twelve months to September 2022).

So, Ponni Sugars (Erode) has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

Check out our latest analysis for Ponni Sugars (Erode)

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

What Does the ROCE Trend For Ponni Sugars (Erode) Tell Us?

In terms of Ponni Sugars (Erode)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.7% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Ponni Sugars (Erode)'s ROCE

While returns have fallen for Ponni Sugars (Erode) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 171% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Ponni Sugars (Erode) does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

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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.