Under The Bonnet, SRF's (NSE:SRF) Returns Look Impressive

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at SRF's (NSE:SRF) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 = ₹29b ÷ (₹158b - ₹44b) (Based on the trailing twelve months to June 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 18%.

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?

The trends we've noticed at SRF are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 128% 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.

What We Can Learn From SRF's ROCE

In summary, it's great to see that SRF can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

While SRF looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SRF is currently trading for a fair price.

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.