Will The ROCE Trend At Shree Rama Multi-Tech (NSE:SHREERAMA) Continue?

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Shree Rama Multi-Tech (NSE:SHREERAMA) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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)

0.044 = ₹43m ÷ (₹1.2b - ₹223m) (Based on the trailing twelve months to September 2020).

Therefore, Shree Rama Multi-Tech has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 13%.

View 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.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 239%. The company is now earning ₹0.04 per dollar of capital employed. In regards to capital employed, Shree Rama Multi-Tech appears to been achieving more with less, since the business is using 36% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In Conclusion...

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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 69% return over the last five years. In light of that, we think it's worth looking further into this stock because if Shree Rama Multi-Tech can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Shree Rama Multi-Tech, we've spotted 5 warning signs, and 2 of them don't sit too well with us.

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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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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