A Look Into 20 Microns' (NSE:20MICRONS) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Ergo, when we looked at the ROCE trends at 20 Microns (NSE:20MICRONS), we liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for 20 Microns, this is the formula:

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

0.22 = ₹815m ÷ (₹5.7b - ₹2.0b) (Based on the trailing twelve months to September 2023).

Thus, 20 Microns has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

Check out our latest analysis for 20 Microns

Historical performance is a great place to start when researching a stock so above you can see the gauge for 20 Microns' ROCE against it's prior returns. If you're interested in investigating 20 Microns' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For 20 Microns Tell Us?

It's hard not to be impressed by 20 Microns' returns on capital. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 58% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

20 Microns has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 245% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, 20 Microns does come with some risks, and we've found 2 warning signs that you should be aware of.

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.