Ruchi Soya Industries' (NSE:RUCHI) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Ruchi Soya Industries (NSE:RUCHI) and its trend of ROCE, we really liked what we saw.

Understanding 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 Ruchi Soya Industries is:

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

0.15 = ₹11b ÷ (₹94b - ₹19b) (Based on the trailing twelve months to September 2021).

Thus, Ruchi Soya Industries has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

View our latest analysis for Ruchi Soya Industries

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 Ruchi Soya Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ruchi Soya Industries Tell Us?

Ruchi Soya Industries has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. In addition to that, Ruchi Soya Industries is employing 221% 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 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ruchi Soya Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To the delight of most shareholders, Ruchi Soya Industries has now broken into profitability. And with a respectable 26% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Ruchi Soya Industries can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Ruchi Soya Industries we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.