What Can The Trends At Shree Rama Multi-Tech (NSE:SHREERAMA) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shree Rama Multi-Tech (NSE:SHREERAMA) and its trend of ROCE, we really liked what we saw.

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. 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)

0.055 = ₹53m ÷ (₹1.2b - ₹223m) (Based on the trailing twelve months to December 2020).

So, Shree Rama Multi-Tech has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Packaging industry average of 13%.

See 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're interested in investigating Shree Rama Multi-Tech's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Shree Rama Multi-Tech. The data shows that returns on capital have increased by 364% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 36% 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.

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

From what we've seen above, Shree Rama Multi-Tech has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 84% 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. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 4 warning signs we've spotted with Shree Rama Multi-Tech (including 2 which are a bit concerning) .

While Shree Rama Multi-Tech 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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