Here's What 20 Microns' (NSE:20MICRONS) Strong Returns On Capital Mean

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ergo, when we looked at the ROCE trends at 20 Microns (NSE:20MICRONS), we liked what we saw.

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 20 Microns is:

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

0.24 = ₹949m ÷ (₹5.9b - ₹1.9b) (Based on the trailing twelve months to June 2024).

Therefore, 20 Microns has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.

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'd like to look at how 20 Microns has performed in the past in other metrics, you can view this free graph of 20 Microns' past earnings, revenue and cash flow.

What Can We Tell From 20 Microns' ROCE Trend?

It's hard not to be impressed by 20 Microns' returns on capital. The company has consistently earned 24% for the last five years, and the capital employed within the business has risen 65% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If 20 Microns can keep this up, we'd be very optimistic about its future.

The Bottom Line On 20 Microns' ROCE

In short, we'd argue 20 Microns has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 919% 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.

One more thing: We've identified 3 warning signs with 20 Microns (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.