Cosmo Films (NSE:COSMOFILMS): Are Investors Overlooking Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Cosmo Films' (NSE:COSMOFILMS) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Cosmo Films:

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

0.20 = ₹2.7b ÷ (₹21b - ₹6.9b) (Based on the trailing twelve months to September 2020).

So, Cosmo Films has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Packaging industry average of 12%.

Check out our latest analysis for Cosmo Films

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Cosmo Films' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Cosmo Films. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 88%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Cosmo Films is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Cosmo Films can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Cosmo Films, we've discovered 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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