Why You Should Care About Hi-Tech Pipes' (NSE:HITECH) Strong Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Hi-Tech Pipes (NSE:HITECH) looks attractive right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Hi-Tech Pipes is:

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

0.21 = ₹804m ÷ (₹6.6b - ₹2.8b) (Based on the trailing twelve months to December 2021).

Thus, Hi-Tech Pipes has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

See our latest analysis for Hi-Tech Pipes

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hi-Tech Pipes' ROCE against it's prior returns. If you'd like to look at how Hi-Tech Pipes 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 Hi-Tech Pipes Tell Us?

Hi-Tech Pipes deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 201% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Hi-Tech Pipes can keep this up, we'd be very optimistic about its future.

On a side note, Hi-Tech Pipes has done well to reduce current liabilities to 42% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

Our Take On Hi-Tech Pipes' ROCE

In short, we'd argue Hi-Tech Pipes has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 94% to shareholders over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with Hi-Tech Pipes (including 1 which is a bit unpleasant) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.