Investors Could Be Concerned With Sahyadri Industries' (NSE:SAHYADRI) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Sahyadri Industries (NSE:SAHYADRI), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sahyadri Industries is:

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

0.079 = ₹307m ÷ (₹5.3b - ₹1.4b) (Based on the trailing twelve months to December 2024).

Thus, Sahyadri Industries has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 7.1%.

View our latest analysis for Sahyadri Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sahyadri Industries' ROCE against it's prior returns. If you'd like to look at how Sahyadri Industries has performed in the past in other metrics, you can view this free graph of Sahyadri Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sahyadri Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 7.9%. However it looks like Sahyadri Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sahyadri Industries' current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

To conclude, we've found that Sahyadri Industries is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

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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.