Shree Renuka Sugars' (NSE:RENUKA) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Shree Renuka Sugars' (NSE:RENUKA) returns on capital, so let's have a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shree Renuka Sugars is:

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

0.11 = ₹1.9b ÷ (₹60b - ₹43b) (Based on the trailing twelve months to December 2021).

Therefore, Shree Renuka Sugars has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.

View our latest analysis for Shree Renuka 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 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

Like most people, we're pleased that Shree Renuka Sugars is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 11% which is no doubt a relief for some early shareholders. In regards to capital employed, Shree Renuka Sugars is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Shree Renuka Sugars could be selling under-performing assets since the ROCE is improving.

One more thing to note, Shree Renuka Sugars has decreased current liabilities to 71% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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.

The Bottom Line

In summary, it's great to see that Shree Renuka Sugars has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Shree Renuka Sugars can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for Shree Renuka Sugars (2 can't be ignored) 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.