Shree Renuka Sugars (NSE:RENUKA) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Shree Renuka Sugars (NSE:RENUKA) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Shree Renuka Sugars, this is the formula:

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

0.19 = ₹4.4b ÷ (₹65b - ₹42b) (Based on the trailing twelve months to December 2022).

Thus, Shree Renuka Sugars has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Shree Renuka Sugars, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Shree Renuka Sugars is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 19% on its capital. In addition to that, Shree Renuka Sugars is employing 81% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 64%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Shree Renuka Sugars' ROCE

To the delight of most shareholders, Shree Renuka Sugars has now broken into profitability. Since the stock has returned a staggering 188% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Shree Renuka Sugars that we think you should be aware of.

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.

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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.