The Trend Of High Returns At Gravita India (NSE:GRAVITA) Has Us Very Interested

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Gravita India's (NSE:GRAVITA) returns on capital, so let's have a look.

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

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 Gravita India, this is the formula:

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

0.34 = ₹1.2b ÷ (₹7.3b - ₹3.9b) (Based on the trailing twelve months to June 2021).

Therefore, Gravita India has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

See our latest analysis for Gravita India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gravita India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gravita India, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Gravita India is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. The amount of capital employed has increased too, by 158%. So we're very much inspired by what we're seeing at Gravita India thanks to its ability to profitably reinvest capital.

Another thing to note, Gravita India has a high ratio of current liabilities to total assets of 53%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, it's terrific to see that Gravita India is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 609% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

On a separate note, we've found 4 warning signs for Gravita India you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
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