Shareholders Would Enjoy A Repeat Of SRF's (NSE:SRF) Recent Growth In Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of SRF (NSE:SRF) looks great, so lets see what the trend can tell us.

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. To calculate this metric for SRF, this is the formula:

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

0.26 = ₹31b ÷ (₹171b - ₹50b) (Based on the trailing twelve months to September 2022).

So, SRF has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

Check out our latest analysis for SRF

In the above chart we have measured SRF's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SRF here for free.

So How Is SRF's ROCE Trending?

Investors would be pleased with what's happening at SRF. The data shows that returns on capital have increased substantially over the last five years to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 119% more capital is being employed now too. So we're very much inspired by what we're seeing at SRF thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, SRF has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 508% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, SRF does come with some risks, and we've found 1 warning sign that you should be aware of.

SRF is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.