Dhanuka Agritech (NSE:DHANUKA) Knows How to Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Dhanuka Agritech (NSE:DHANUKA) looks attractive right now, so lets see what the trend of returns can tell us.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dhanuka Agritech, this is the formula:

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

0.26 = ₹2.2b ÷ (₹12b - ₹3.6b) (Based on the trailing twelve months to September 2020).

So, Dhanuka Agritech has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for Dhanuka Agritech

In the above chart we have measured Dhanuka Agritech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dhanuka Agritech here for free.

The Trend Of ROCE

In terms of Dhanuka Agritech's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 75% more capital into its operations. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Dhanuka Agritech can keep this up, we'd be very optimistic about its future.

What We Can Learn From Dhanuka Agritech's ROCE

In short, we'd argue Dhanuka Agritech has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 52% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Dhanuka Agritech that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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