Sarda Energy & Minerals' (NSE:SARDAEN) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Sarda Energy & Minerals (NSE:SARDAEN) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Sarda Energy & Minerals, this is the formula:

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

0.18 = ₹8.7b ÷ (₹55b - ₹7.5b) (Based on the trailing twelve months to March 2023).

So, Sarda Energy & Minerals has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Metals and Mining industry.

Check out our latest analysis for Sarda Energy & Minerals

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 Sarda Energy & Minerals, check out these free graphs here.

What Does the ROCE Trend For Sarda Energy & Minerals Tell Us?

Sarda Energy & Minerals is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 73%. So we're very much inspired by what we're seeing at Sarda Energy & Minerals thanks to its ability to profitably reinvest capital.

The Bottom Line On Sarda Energy & Minerals' ROCE

To sum it up, Sarda Energy & Minerals has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 386% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for Sarda Energy & Minerals that we think you should be aware of.

While Sarda Energy & Minerals 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. 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.