Shree Renuka Sugars (NSE:RENUKA) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Shree Renuka Sugars' (NSE:RENUKA) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shree Renuka Sugars is:

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

0.094 = ₹2.2b ÷ (₹71b - ₹48b) (Based on the trailing twelve months to March 2022).

Thus, Shree Renuka Sugars has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

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're interested in investigating Shree Renuka Sugars' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shree Renuka Sugars Tell Us?

We're delighted to see that Shree Renuka Sugars is reaping rewards from its investments and has now broken into profitability. The company now earns 9.4% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 67%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Shree Renuka Sugars' ROCE

To bring it all together, Shree Renuka Sugars has done well to increase the returns it's generating from its capital employed. And a remarkable 302% 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.

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 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.

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

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.