Stock Analysis

There's Been No Shortage Of Growth Recently For Radico Khaitan's (NSE:RADICO) Returns On Capital

NSEI:RADICO
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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. So on that note, Radico Khaitan (NSE:RADICO) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Radico Khaitan, this is the formula:

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

0.19 = ₹3.3b ÷ (₹25b - ₹8.0b) (Based on the trailing twelve months to December 2020).

Therefore, Radico Khaitan has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Beverage industry average of 13% it's much better.

Check out our latest analysis for Radico Khaitan

roce
NSEI:RADICO Return on Capital Employed April 20th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Radico Khaitan's ROCE against it's prior returns. If you'd like to look at how Radico Khaitan has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at Radico Khaitan are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Radico Khaitan has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To sum it up, Radico Khaitan has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 460% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While Radico Khaitan 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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This article by Simply Wall St is general in nature. 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.
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