Shree Renuka Sugars (NSE:RENUKA) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Shree Renuka Sugars (NSE:RENUKA) 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 Shree Renuka Sugars:

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

0.065 = ₹1.1b ÷ (₹60b - ₹43b) (Based on the trailing twelve months to September 2021).

So, Shree Renuka Sugars has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See our latest analysis for Shree Renuka Sugars

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

So How Is Shree Renuka Sugars' ROCE Trending?

It's great to see that Shree Renuka Sugars has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.5% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 24%. Shree Renuka Sugars could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 71%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Shree Renuka Sugars has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

In a nutshell, we're pleased to see that Shree Renuka Sugars has been able to generate higher returns from less capital. Since the stock has returned a solid 81% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shree Renuka Sugars (of which 2 are potentially serious!) that you should know about.

While Shree Renuka Sugars isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.