Is Rana Sugars (NSE:RANASUG) A Future Multi-bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Rana Sugars (NSE:RANASUG) looks quite promising in regards to its trends of return on capital.

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)

0.12 = ₹437m ÷ (₹11b - ₹7.1b) (Based on the trailing twelve months to June 2020).

Thus, Rana Sugars has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.

See our latest analysis for Rana Sugars

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

The Trend Of ROCE

We're delighted to see that Rana Sugars is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 12% on its capital. While returns have increased, the amount of capital employed by Rana Sugars has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, Rana Sugars' current liabilities are still rather high at 67% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Rana Sugars is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 125% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Rana Sugars, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Rana Sugars may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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