Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sree Rayalaseema Hi-Strength Hypo:

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

0.17 = ₹1.3b ÷ (₹9.1b - ₹1.3b) (Based on the trailing twelve months to December 2022).

Thus, Sree Rayalaseema Hi-Strength Hypo has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 16% generated by the Chemicals industry.

Check out 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 The Trend Of ROCE Can Tell Us

Sree Rayalaseema Hi-Strength Hypo is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 158% more capital is being employed now too. So we're very much inspired by what we're seeing at Sree Rayalaseema Hi-Strength Hypo thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Sree Rayalaseema Hi-Strength Hypo's ROCE

To sum it up, Sree Rayalaseema Hi-Strength Hypo has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 334% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Sree Rayalaseema Hi-Strength Hypo can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Sree Rayalaseema Hi-Strength Hypo that you might find interesting.

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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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.