Ramco Industries (NSE:RAMCOIND) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Ramco Industries (NSE:RAMCOIND) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Ramco Industries, this is the formula:

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

0.041 = ₹1.6b ÷ (₹44b - ₹5.2b) (Based on the trailing twelve months to December 2022).

Therefore, Ramco Industries has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.4%.

See our latest analysis for Ramco Industries

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

SWOT Analysis for Ramco Industries

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, Ramco Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 36% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Ramco Industries, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ramco 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.