Finolex Industries (NSE:FINPIPE) Is Investing Its Capital With Increasing Efficiency

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Finolex Industries' (NSE:FINPIPE) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Finolex Industries, this is the formula:

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

0.32 = ₹12b ÷ (₹45b - ₹7.4b) (Based on the trailing twelve months to September 2021).

So, Finolex Industries has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

View our latest analysis for Finolex Industries

In the above chart we have measured Finolex Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Finolex Industries.

How Are Returns Trending?

The trends we've noticed at Finolex Industries are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 32%. The amount of capital employed has increased too, by 71%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

In summary, it's great to see that Finolex Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Finolex Industries can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Finolex Industries (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

Finolex Industries 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.

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.

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