What Can The Trends At Gujarat Sidhee Cement (NSE:GSCLCEMENT) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Gujarat Sidhee Cement (NSE:GSCLCEMENT) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gujarat Sidhee Cement, this is the formula:

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

0.10 = ₹502m ÷ (₹6.4b - ₹1.6b) (Based on the trailing twelve months to September 2020).

Thus, Gujarat Sidhee Cement has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Basic Materials industry.

Check out our latest analysis for Gujarat Sidhee Cement

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Sidhee Cement's ROCE against it's prior returns. If you'd like to look at how Gujarat Sidhee Cement has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gujarat Sidhee Cement Tell Us?

We're delighted to see that Gujarat Sidhee Cement is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. Not only that, but the company is utilizing 116% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 25%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Gujarat Sidhee Cement's ROCE

Overall, Gujarat Sidhee Cement gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 48% 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. In light of that, we think it's worth looking further into this stock because if Gujarat Sidhee Cement can keep these trends up, it could have a bright future ahead.

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

While Gujarat Sidhee Cement isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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