Will Sanghi Industries (NSE:SANGHIIND) Multiply In Value Going Forward?

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. 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. 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)

0.038 = ₹1.1b ÷ (₹36b - ₹8.0b) (Based on the trailing twelve months to September 2020).

So, Sanghi Industries has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 11%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Sanghi Industries, check out these free graphs here.

So How Is Sanghi Industries' ROCE Trending?

There are better returns on capital out there than what we're seeing at Sanghi Industries. Over the past five years, ROCE has remained relatively flat at around 3.8% and the business has deployed 105% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Sanghi Industries' ROCE

As we've seen above, Sanghi Industries' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sanghi Industries has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Sanghi Industries (including 1 which is a bit unpleasant) .

While Sanghi Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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