The Returns At Rain Industries (NSE:RAIN) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, the ROCE of Rain Industries (NSE:RAIN) looks decent, right now, so lets see what the trend of returns can tell us.

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. 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)

0.11 = ₹18b ÷ (₹187b - ₹30b) (Based on the trailing twelve months to March 2022).

Therefore, Rain Industries has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

See 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're interested in investigating Rain Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Rain Industries' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 39% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Rain Industries has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Rain Industries' ROCE

In the end, Rain Industries has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 37% over the last five years for shareholders who have owned the stock in this period. So to determine if Rain Industries is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Rain Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.