Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Is Achieving High Returns On Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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 Sree Rayalaseema Hi-Strength Hypo, this is the formula:

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

0.20 = ₹1.6b ÷ (₹9.1b - ₹1.3b) (Based on the trailing twelve months to September 2022).

Thus, Sree Rayalaseema Hi-Strength Hypo has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

View 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.

What Does the ROCE Trend For Sree Rayalaseema Hi-Strength Hypo Tell Us?

We like the trends that we're seeing from Sree Rayalaseema Hi-Strength Hypo. The data shows that returns on capital have increased substantially over the last five years to 20%. The amount of capital employed has increased too, by 158%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 14%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

All in all, it's terrific to see that Sree Rayalaseema Hi-Strength Hypo is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 177% 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.

If you want to continue researching Sree Rayalaseema Hi-Strength Hypo, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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

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.