If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, Sagar Cements (NSE:SAGCEM) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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 Sagar Cements is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₹2.7b ÷ (₹21b - ₹4.8b) (Based on the trailing twelve months to December 2020).
So, Sagar Cements has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Basic Materials industry.
View our latest analysis for Sagar Cements
Above you can see how the current ROCE for Sagar Cements compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sagar Cements.
So How Is Sagar Cements' ROCE Trending?
Investors would be pleased with what's happening at Sagar Cements. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 106% more capital is being employed now too. So we're very much inspired by what we're seeing at Sagar Cements thanks to its ability to profitably reinvest capital.
What We Can Learn From Sagar Cements' ROCE
To sum it up, Sagar Cements has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 98% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Sagar Cements does come with some risks, and we've found 2 warning signs that you should be aware of.
While Sagar Cements 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. 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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About NSEI:SAGCEM
Undervalued with reasonable growth potential.
