Shareholders Would Enjoy A Repeat Of E.I.D.- Parry (India)'s (NSE:EIDPARRY) Recent Growth In Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of E.I.D.- Parry (India) (NSE:EIDPARRY) we really liked what we saw.

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. To calculate this metric for E.I.D.- Parry (India), this is the formula:

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

0.32 = ₹22b ÷ (₹136b - ₹67b) (Based on the trailing twelve months to December 2020).

So, E.I.D.- Parry (India) has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

Check out our latest analysis for E.I.D.- Parry (India)

Above you can see how the current ROCE for E.I.D.- Parry (India) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is E.I.D.- Parry (India)'s ROCE Trending?

We like the trends that we're seeing from E.I.D.- Parry (India). Over the last five years, returns on capital employed have risen substantially to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 62% more capital is being employed now too. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 49%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On E.I.D.- Parry (India)'s ROCE

To sum it up, E.I.D.- Parry (India) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 87% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

If you'd like to know about the risks facing E.I.D.- Parry (India), we've discovered 2 warning signs that you should be aware of.

E.I.D.- Parry (India) 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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