Returns On Capital Are Showing Encouraging Signs At Ponni Sugars (Erode) (NSE:PONNIERODE)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Ponni Sugars (Erode) (NSE:PONNIERODE) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.087 = ₹291m ÷ (₹3.8b - ₹431m) (Based on the trailing twelve months to March 2021).

Therefore, Ponni Sugars (Erode) has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

View 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'd like to look at how Ponni Sugars (Erode) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Ponni Sugars (Erode) is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.8% which is a sight for sore eyes. Not only that, but the company is utilizing 102% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Ponni Sugars (Erode) has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Ponni Sugars (Erode)'s ROCE

Overall, Ponni Sugars (Erode) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.1% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 3 warning signs for Ponni Sugars (Erode) that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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