Rain Industries (NSE:RAIN) Has More To Do To Multiply In Value Going Forward

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Rain Industries (NSE:RAIN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Rain Industries, this is the formula:

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

0.099 = ₹16b ÷ (₹187b - ₹30b) (Based on the trailing twelve months to December 2021).

So, Rain Industries has an ROCE of 9.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 18%.

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 want to delve into the historical earnings, revenue and cash flow of Rain Industries, check out these free graphs here.

So How Is Rain Industries' ROCE Trending?

In terms of Rain Industries' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 39% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

As we've seen above, Rain Industries' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 91% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 3 warning signs with Rain Industries (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Rain Industries 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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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.