Will DCM Shriram's (NSE:DCMSHRIRAM) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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, DCM Shriram (NSE:DCMSHRIRAM) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for DCM Shriram:

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

0.15 = ₹8.1b ÷ (₹75b - ₹20b) (Based on the trailing twelve months to September 2020).

So, DCM Shriram has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

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'd like to look at how DCM Shriram has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Investors would be pleased with what's happening at DCM Shriram. Over the last five years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 106%. So we're very much inspired by what we're seeing at DCM Shriram thanks to its ability to profitably reinvest capital.

One more thing to note, DCM Shriram has decreased current liabilities to 27% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On DCM Shriram's ROCE

To sum it up, DCM Shriram has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 189% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 3 warning signs with DCM Shriram and understanding them should be part of your investment process.

While DCM Shriram 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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