Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Sanghi Industries (NSE:SANGHIIND) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sanghi Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = ₹1.4b ÷ (₹36b - ₹8.0b) (Based on the trailing twelve months to December 2020).
Thus, Sanghi Industries has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanghi Industries' ROCE against it's prior returns. If you'd like to look at how Sanghi Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven't changed much for Sanghi Industries in recent years. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 105% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In conclusion, Sanghi Industries has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a final note, we found 3 warning signs for Sanghi Industries (2 shouldn't be ignored) you should be aware of.
While Sanghi Industries 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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