Returns On Capital Are Showing Encouraging Signs At Krsnaa Diagnostics (NSE:KRSNAA)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Krsnaa Diagnostics' (NSE:KRSNAA) returns on capital, so let's have a look.

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

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 Krsnaa Diagnostics is:

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

0.11 = ₹879m ÷ (₹9.1b - ₹992m) (Based on the trailing twelve months to March 2023).

Therefore, Krsnaa Diagnostics has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Healthcare industry average it falls behind.

View our latest analysis for Krsnaa Diagnostics

Above you can see how the current ROCE for Krsnaa Diagnostics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Krsnaa Diagnostics here for free.

SWOT Analysis for Krsnaa Diagnostics

What Does the ROCE Trend For Krsnaa Diagnostics Tell Us?

The trends we've noticed at Krsnaa Diagnostics are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 366%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

What We Can Learn From Krsnaa Diagnostics' ROCE

All in all, it's terrific to see that Krsnaa Diagnostics is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Krsnaa Diagnostics, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

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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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.