What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Grasim Industries (NSE:GRASIM), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Grasim Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = ₹222b ÷ (₹4.1t - ₹924b) (Based on the trailing twelve months to March 2024).
Therefore, Grasim Industries has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 7.8%.
Check out our latest analysis for Grasim Industries
In the above chart we have measured Grasim Industries' 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 Grasim Industries for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Grasim Industries. The company has employed 66% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Grasim Industries' ROCE
In summary, Grasim Industries has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 199% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Grasim Industries does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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About NSEI:GRASIM
Grasim Industries
Primarily operates in fibre, yarn, pulp, chemicals, textile, fertilizers, and insulators businesses in India and internationally.
Moderate second-rate dividend payer.
