We Think Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) Might Have The DNA Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Sree Rayalaseema Hi-Strength Hypo's (NSE:SRHHYPOLTD) look very promising so lets take a look.

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. 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)

0.21 = ₹779m ÷ (₹4.4b - ₹720m) (Based on the trailing twelve months to December 2020).

Thus, Sree Rayalaseema Hi-Strength Hypo has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

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'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?

Sree Rayalaseema Hi-Strength Hypo is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 21%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

What We Can Learn From Sree Rayalaseema Hi-Strength Hypo's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sree Rayalaseema Hi-Strength Hypo has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

Sree Rayalaseema Hi-Strength Hypo is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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