We Like These Underlying Return On Capital Trends At Shree Rama Multi-Tech (NSE:SHREERAMA)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.041 = ₹41m ÷ (₹1.2b - ₹161m) (Based on the trailing twelve months to March 2021).

Thus, Shree Rama Multi-Tech has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 13%.

Check out our latest analysis for Shree Rama Multi-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shree Rama Multi-Tech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shree Rama Multi-Tech, check out these free graphs here.

The Trend Of ROCE

While the ROCE is still rather low for Shree Rama Multi-Tech, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 340% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 31% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Shree Rama Multi-Tech may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In summary, it's great to see that Shree Rama Multi-Tech has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 50% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Shree Rama Multi-Tech does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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