Venky's (India) (NSE:VENKEYS) Knows How To Allocate Capital Effectively

By
Simply Wall St
Published
August 27, 2021
NSEI:VENKEYS
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Venky's (India)'s (NSE:VENKEYS) look very promising so lets take a look.

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. To calculate this metric for Venky's (India), this is the formula:

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

0.31 = ₹3.6b ÷ (₹18b - ₹6.3b) (Based on the trailing twelve months to June 2021).

Therefore, Venky's (India) has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

See our latest analysis for Venky's (India)

roce
NSEI:VENKEYS Return on Capital Employed August 28th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Venky's (India)'s ROCE against it's prior returns. If you're interested in investigating Venky's (India)'s past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Venky's (India)'s ROCE Trending?

We like the trends that we're seeing from Venky's (India). The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. 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, Venky's (India) has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Venky's (India)'s ROCE

To sum it up, Venky's (India) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One more thing, we've spotted 2 warning signs facing Venky's (India) that you might find interesting.

Venky's (India) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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