DCM Shriram (NSE:DCMSHRIRAM) Looks To Prolong Its Impressive Returns

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, the ROCE of DCM Shriram (NSE:DCMSHRIRAM) looks attractive right now, so lets see what the trend of returns can tell us.

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

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 DCM Shriram, this is the formula:

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

0.22 = ₹16b ÷ (₹94b - ₹24b) (Based on the trailing twelve months to March 2022).

So, DCM Shriram has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

View our latest analysis for DCM Shriram

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 DCM Shriram's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For DCM Shriram Tell Us?

We'd be pretty happy with returns on capital like DCM Shriram. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 119% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If DCM Shriram can keep this up, we'd be very optimistic about its future.

On a side note, DCM Shriram has done well to reduce current liabilities to 25% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In short, we'd argue DCM Shriram 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 196% 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.

On a separate note, we've found 2 warning signs for DCM Shriram you'll probably want to know about.

DCM Shriram is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.