Stock Analysis

Shree Rama Multi-Tech (NSE:SHREERAMA) Is Doing The Right Things To Multiply Its Share Price

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shree Rama Multi-Tech (NSE:SHREERAMA) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shree Rama Multi-Tech is:

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

0.035 = ₹33m ÷ (₹1.3b - ₹375m) (Based on the trailing twelve months to December 2022).

So, Shree Rama Multi-Tech has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Packaging industry average of 13%.

Check out our latest analysis for Shree Rama Multi-Tech

NSEI:SHREERAMA Return on Capital Employed March 18th 2023

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'd like to look at how Shree Rama Multi-Tech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the ROCE is still rather low for Shree Rama Multi-Tech, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 855%. The company is now earning ₹0.03 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 20% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Shree Rama Multi-Tech's ROCE

In a nutshell, we're pleased to see that Shree Rama Multi-Tech has been able to generate higher returns from less capital. Given the stock has declined 17% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Shree Rama Multi-Tech does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Shree Rama Multi-Tech is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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