Investors Will Want Rain Industries' (NSE:RAIN) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Rain Industries (NSE:RAIN) so let's look a bit deeper.

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. The formula for this calculation on Rain Industries is:

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

0.091 = ₹15b ÷ (₹189b - ₹27b) (Based on the trailing twelve months to September 2021).

Therefore, Rain Industries has an ROCE of 9.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.

Check out our latest analysis for Rain Industries

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

So How Is Rain Industries' ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 9.1%. The amount of capital employed has increased too, by 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Rain Industries' ROCE

In summary, it's great to see that Rain Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 302% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Rain Industries can keep these trends up, it could have a bright future ahead.

Rain Industries does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Rain Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.