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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at DCM Shriram (NSE:DCMSHRIRAM) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for DCM Shriram:

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

0.17 = ₹9.2b ÷ (₹75b - ₹20b) (Based on the trailing twelve months to December 2020).

So, DCM Shriram has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Chemicals industry.

Check out our latest analysis for DCM Shriram

Historical performance is a great place to start when researching a stock so above you can see the gauge for DCM Shriram's ROCE against it's prior returns. 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.

The Trend Of ROCE

DCM Shriram is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 106%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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

All in all, it's terrific to see that DCM Shriram is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 349% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for DCM Shriram that we think you should be aware of.

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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