Returns On Capital Are Showing Encouraging Signs At Archidply Industries (NSE:ARCHIDPLY)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Archidply Industries (NSE:ARCHIDPLY) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Archidply Industries, this is the formula:

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

0.11 = ₹185m ÷ (₹2.9b - ₹1.3b) (Based on the trailing twelve months to December 2023).

Thus, Archidply Industries has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Forestry industry.

See our latest analysis for Archidply Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Archidply Industries' ROCE against it's prior returns. If you'd like to look at how Archidply Industries has performed in the past in other metrics, you can view this free graph of Archidply Industries' past earnings, revenue and cash flow.

What Can We Tell From Archidply Industries' ROCE Trend?

Archidply Industries is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 80% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Archidply Industries has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Archidply Industries' ROCE

In summary, we're delighted to see that Archidply Industries has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Archidply Industries can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Archidply Industries, we've spotted 3 warning signs, and 1 of them is a bit concerning.

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.