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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Shree Renuka Sugars' (NSE:RENUKA) returns on capital, so let's have a look.

Our free stock report includes 2 warning signs investors should be aware of before investing in Shree Renuka Sugars. Read for free now.

Return On Capital Employed (ROCE): What Is It?

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)

0.18 = ₹3.5b ÷ (₹75b - ₹56b) (Based on the trailing twelve months to December 2024).

Thus, Shree Renuka Sugars has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.

See 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 , check out these free graphs detailing revenue and cash flow performance of Shree Renuka Sugars.

How Are Returns Trending?

The fact that Shree Renuka Sugars is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 18% which is a sight for sore eyes. In addition to that, Shree Renuka Sugars is employing 38% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a separate but related note, it's important to know that Shree Renuka Sugars has a current liabilities to total assets ratio of 74%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shree Renuka Sugars' ROCE

Long story short, we're delighted to see that Shree Renuka Sugars' reinvestment activities have paid off and the company is now profitable. And a remarkable 441% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to continue researching Shree Renuka Sugars, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.