Ratnamani Metals & Tubes (NSE:RATNAMANI) Knows How To Allocate Capital Effectively

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Ratnamani Metals & Tubes' (NSE:RATNAMANI) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ratnamani Metals & Tubes is:

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

0.24 = ₹6.9b ÷ (₹38b - ₹8.6b) (Based on the trailing twelve months to March 2023).

Therefore, Ratnamani Metals & Tubes has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 13%.

Check out our latest analysis for Ratnamani Metals & Tubes

Above you can see how the current ROCE for Ratnamani Metals & Tubes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ratnamani Metals & Tubes here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Ratnamani Metals & Tubes. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The amount of capital employed has increased too, by 116%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that Ratnamani Metals & Tubes is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 292% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Ratnamani Metals & Tubes does come with some risks, and we've found 1 warning sign that you should be aware of.

Ratnamani Metals & Tubes 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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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.