Surya Roshni (NSE:SURYAROSNI) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Surya Roshni (NSE:SURYAROSNI) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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. Analysts use this formula to calculate it for Surya Roshni:

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

0.18 = ₹3.1b ÷ (₹31b - ₹14b) (Based on the trailing twelve months to June 2022).

Thus, Surya Roshni has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 17%.

Our analysis indicates that SURYAROSNI is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Surya Roshni's ROCE against it's prior returns. If you'd like to look at how Surya Roshni has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Surya Roshni's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 50% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Surya Roshni has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Surya Roshni's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, Surya Roshni has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 34% over the last five years for shareholders who have owned the stock in this period. So to determine if Surya Roshni is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you'd like to know about the risks facing Surya Roshni, we've discovered 2 warning signs that 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.