Here’s What’s Happening With Returns At Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 on that note, Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sree Rayalaseema Hi-Strength Hypo, this is the formula:

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

0.19 = ₹701m ÷ (₹4.4b - ₹720m) (Based on the trailing twelve months to September 2020).

Therefore, Sree Rayalaseema Hi-Strength Hypo has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 14% it's much better.

See our latest analysis for Sree Rayalaseema Hi-Strength Hypo

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 want to delve into the historical earnings, revenue and cash flow of Sree Rayalaseema Hi-Strength Hypo, check out these free graphs here.

What Can We Tell From Sree Rayalaseema Hi-Strength Hypo's ROCE Trend?

Investors would be pleased with what's happening at Sree Rayalaseema Hi-Strength Hypo. Over the last five years, returns on capital employed have risen substantially to 19%. 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 50%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Sree Rayalaseema Hi-Strength Hypo has decreased current liabilities to 16% 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.

The Bottom Line On Sree Rayalaseema Hi-Strength Hypo's ROCE

In summary, it's great to see that Sree Rayalaseema Hi-Strength Hypo 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. Since the stock has returned a staggering 331% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

Like most companies, Sree Rayalaseema Hi-Strength Hypo does come with some risks, and we've found 3 warning signs that you should be aware of.

While Sree Rayalaseema Hi-Strength Hypo may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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