Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) looks decent, right now, so lets see what the trend of returns 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. The formula for this calculation on Sree Rayalaseema Hi-Strength Hypo is:

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

0.18 = ₹876m ÷ (₹6.4b - ₹1.5b) (Based on the trailing twelve months to September 2021).

Therefore, Sree Rayalaseema Hi-Strength Hypo has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

See our latest analysis for Sree Rayalaseema Hi-Strength Hypo

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sree Rayalaseema Hi-Strength Hypo's ROCE against it's prior returns. If you're interested in investigating Sree Rayalaseema Hi-Strength Hypo's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sree Rayalaseema Hi-Strength Hypo's ROCE Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 103% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that Sree Rayalaseema Hi-Strength Hypo has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

To sum it up, Sree Rayalaseema Hi-Strength Hypo has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 182% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 2 warning signs for Sree Rayalaseema Hi-Strength Hypo that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.