Here's What's Concerning About Rajratan Global Wire's (NSE:RAJRATAN) 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Rajratan Global Wire (NSE:RAJRATAN), it does have a high ROCE right now, but lets see how returns are trending.

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. To calculate this metric for Rajratan Global Wire, this is the formula:

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

0.26 = ₹780m ÷ (₹4.4b - ₹1.4b) (Based on the trailing twelve months to March 2021).

So, Rajratan Global Wire has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

View our latest analysis for Rajratan Global Wire

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rajratan Global Wire's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rajratan Global Wire, check out these free graphs here.

So How Is Rajratan Global Wire's ROCE Trending?

On the surface, the trend of ROCE at Rajratan Global Wire doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 39%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Rajratan Global Wire has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Rajratan Global Wire's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Rajratan Global Wire. And long term investors must be optimistic going forward because the stock has returned a huge 462% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Rajratan Global Wire, you might be interested to know about the 3 warning signs that our analysis has discovered.

Rajratan Global Wire is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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