Will The ROCE Trend At Shree Renuka Sugars (NSE:RENUKA) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Shree Renuka Sugars (NSE:RENUKA) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.12 = ₹2.4b ÷ (₹62b - ₹42b) (Based on the trailing twelve months to September 2020).

Thus, Shree Renuka Sugars has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

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'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?

Shree Renuka Sugars has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 12% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 68%, 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Shree Renuka Sugars' ROCE

As discussed above, Shree Renuka Sugars appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Shree Renuka Sugars does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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