Why The 42% Return On Capital At Sarthak Metals (NSE:SMLT) Should Have Your Attention

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 the ROCE trend of Sarthak Metals (NSE:SMLT) 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 Sarthak Metals is:

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

0.42 = ₹426m ÷ (₹1.2b - ₹169m) (Based on the trailing twelve months to December 2022).

Thus, Sarthak Metals has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 15%.

See our latest analysis for Sarthak Metals

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

What Does the ROCE Trend For Sarthak Metals Tell Us?

Investors would be pleased with what's happening at Sarthak Metals. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 42%. 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 159%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 14%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Sarthak Metals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To sum it up, Sarthak Metals has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Sarthak Metals that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.