Here's What To Make Of Everest Kanto Cylinder's (NSE:EKC) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Everest Kanto Cylinder's (NSE:EKC) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Everest Kanto Cylinder, this is the formula:

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

0.11 = ₹1.2b ÷ (₹14b - ₹2.6b) (Based on the trailing twelve months to March 2024).

Therefore, Everest Kanto Cylinder has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Packaging industry.

View our latest analysis for Everest Kanto Cylinder

Above you can see how the current ROCE for Everest Kanto Cylinder compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Everest Kanto Cylinder for free.

So How Is Everest Kanto Cylinder's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 84% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 19% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, Everest Kanto Cylinder has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 462% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 1 warning sign with Everest Kanto Cylinder and understanding it should be part of your investment process.

While Everest Kanto Cylinder 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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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.