The Returns On Capital At Sanghi Industries (NSE:SANGHIIND) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sanghi Industries (NSE:SANGHIIND) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Sanghi Industries, this is the formula:

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

0.06 = ₹1.8b ÷ (₹36b - ₹6.4b) (Based on the trailing twelve months to March 2021).

Therefore, Sanghi Industries has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 14%.

See our latest analysis for Sanghi Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Sanghi Industries' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Sanghi Industries' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.2% over the last five years. However it looks like Sanghi 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Sanghi Industries' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Sanghi Industries (2 are a bit unpleasant) 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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