Is Ballarpur Industries (NSE:BALLARPUR) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ballarpur Industries (NSE:BALLARPUR) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Ballarpur Industries, this is the formula:

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

0.12 = ₹3.5b ÷ (₹112b - ₹84b) (Based on the trailing twelve months to December 2019).

So, Ballarpur Industries has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 9.3% it's much better.

See our latest analysis for Ballarpur Industries

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

So How Is Ballarpur Industries' ROCE Trending?

Ballarpur Industries has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 164%. The company is now earning ₹0.1 per dollar of capital employed. In regards to capital employed, Ballarpur Industries appears to been achieving more with less, since the business is using 64% less capital to run its operation. Ballarpur Industries may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 74% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Ballarpur Industries' ROCE

In the end, Ballarpur Industries has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 5 warning signs for Ballarpur Industries (2 don't sit too well with us) you should be aware of.

While Ballarpur Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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