Investors Will Want Madhya Bharat Agro Products' (NSE:MBAPL) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Madhya Bharat Agro Products (NSE:MBAPL) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Madhya Bharat Agro Products:

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

0.19 = ₹342m ÷ (₹2.4b - ₹613m) (Based on the trailing twelve months to December 2020).

Therefore, Madhya Bharat Agro Products has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 15% generated by the Chemicals industry.

See our latest analysis for Madhya Bharat Agro Products

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Madhya Bharat Agro Products' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Madhya Bharat Agro Products' ROCE Trending?

Investors would be pleased with what's happening at Madhya Bharat Agro Products. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 93% more capital is being employed now too. So we're very much inspired by what we're seeing at Madhya Bharat Agro Products thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 25% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Madhya Bharat Agro Products' ROCE

To sum it up, Madhya Bharat Agro Products has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 113% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 3 warning signs for Madhya Bharat Agro Products that we think you should be aware of.

While Madhya Bharat Agro Products 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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