Investors Should Be Encouraged By Rana Sugars' (NSE:RANASUG) Returns On Capital

By
Simply Wall St
Published
May 12, 2022
NSEI:RANASUG
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 the ROCE trend of Rana Sugars (NSE:RANASUG) we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Rana Sugars, this is the formula:

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

0.32 = ₹1.7b ÷ (₹8.3b - ₹2.9b) (Based on the trailing twelve months to December 2021).

Thus, Rana Sugars has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Food industry average of 13%.

View our latest analysis for Rana Sugars

roce
NSEI:RANASUG Return on Capital Employed May 12th 2022

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're interested in investigating Rana Sugars' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Rana Sugars' ROCE Trending?

Rana Sugars is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% 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.

One more thing to note, Rana Sugars has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Rana Sugars has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Rana Sugars' ROCE

All in all, it's terrific to see that Rana Sugars is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 204% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Rana Sugars can keep these trends up, it could have a bright future ahead.

If you want to continue researching Rana Sugars, you might be interested to know about the 3 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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