Why The 21% Return On Capital At Savita Oil Technologies (NSE:SOTL) Should Have Your Attention

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Savita Oil Technologies' (NSE:SOTL) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Savita Oil Technologies:

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

0.21 = ₹1.9b ÷ (₹13b - ₹3.6b) (Based on the trailing twelve months to December 2020).

Thus, Savita Oil Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

Check out our latest analysis for Savita Oil Technologies

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 Savita Oil Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Savita Oil Technologies is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 44% more capital is being employed now too. 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.

One more thing to note, Savita Oil Technologies has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Savita Oil Technologies' ROCE

To sum it up, Savita Oil Technologies 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 91% return over the last five years. In light of that, we think it's worth looking further into this stock because if Savita Oil Technologies can keep these trends up, it could have a bright future ahead.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

If you decide to trade Savita Oil Technologies, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.