The Trends At Ratnamani Metals & Tubes (NSE:RATNAMANI) That You Should Know About

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Ratnamani Metals & Tubes (NSE:RATNAMANI) and its ROCE trend, we weren't exactly thrilled.

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 Ratnamani Metals & Tubes, this is the formula:

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

0.15 = ₹3.0b ÷ (₹24b - ₹3.9b) (Based on the trailing twelve months to September 2020).

Therefore, Ratnamani Metals & Tubes has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Metals and Mining industry.

Check out our latest analysis for Ratnamani Metals & Tubes

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ratnamani Metals & Tubes' ROCE against it's prior returns. If you're interested in investigating Ratnamani Metals & Tubes' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ratnamani Metals & Tubes, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 23% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Ratnamani Metals & Tubes is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 227% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 2 warning signs facing Ratnamani Metals & Tubes that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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