Are Investors Overlooking Returns On Capital At Agarwal Industrial (NSE:AGARIND)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So, when we ran our eye over Agarwal Industrial's (NSE:AGARIND) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Agarwal Industrial, this is the formula:

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

0.20 = ₹335m ÷ (₹3.0b - ₹1.4b) (Based on the trailing twelve months to June 2020).

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

View our latest analysis for Agarwal Industrial

Above you can see how the current ROCE for Agarwal Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Agarwal Industrial.

So How Is Agarwal Industrial's ROCE Trending?

In terms of Agarwal Industrial's history of ROCE, it's quite impressive. The company has employed 231% more capital in the last five years, and the returns on that capital have remained stable at 20%. 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.

On a separate but related note, it's important to know that Agarwal Industrial has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Agarwal Industrial has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing, we've spotted 4 warning signs facing Agarwal Industrial that you might find interesting.

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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