Ugar Sugar Works (NSE:UGARSUGAR) Could Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Ugar Sugar Works' (NSE:UGARSUGAR) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ugar Sugar Works is:

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

0.40 = ₹1.1b ÷ (₹7.2b - ₹4.5b) (Based on the trailing twelve months to September 2022).

Therefore, Ugar Sugar Works has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Ugar Sugar Works

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ugar Sugar Works' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ugar Sugar Works, check out these free graphs here.

What Can We Tell From Ugar Sugar Works' ROCE Trend?

We like the trends that we're seeing from Ugar Sugar Works. Over the last five years, returns on capital employed have risen substantially to 40%. The amount of capital employed has increased too, by 170%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Ugar Sugar Works has decreased current liabilities to 62% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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.

The Key Takeaway

In summary, it's great to see that Ugar Sugar Works can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 271% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Ugar Sugar Works can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Ugar Sugar Works (including 2 which are a bit unpleasant) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.