Indraprastha Medical (NSE:INDRAMEDCO) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Indraprastha Medical's (NSE:INDRAMEDCO) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Indraprastha Medical, this is the formula:

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

0.28 = ₹1.1b ÷ (₹5.8b - ₹2.0b) (Based on the trailing twelve months to September 2022).

Therefore, Indraprastha Medical has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 14%.

Check out our latest analysis for Indraprastha Medical

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

How Are Returns Trending?

Indraprastha Medical is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 33%. 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.

What We Can Learn From Indraprastha Medical's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Indraprastha Medical has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 74% return over the last five years. In light of that, we think it's worth looking further into this stock because if Indraprastha Medical can keep these trends up, it could have a bright future ahead.

If you want to continue researching Indraprastha Medical, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.