Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. So, when we ran our eye over Surya Roshni’s (NSE:SURYAROSNI) trend of ROCE, we 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. To calculate this metric for Surya Roshni, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = ₹2.5b ÷ (₹30b – ₹13b) (Based on the trailing twelve months to March 2020).
So, Surya Roshni has an ROCE of 15%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Metals and Mining industry average of 13%.
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.
The Trend Of ROCE
While the current returns on capital are decent, they haven’t changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 31% in that time. 15% 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 separate but related note, it’s important to know that Surya Roshni has a current liabilities to total assets ratio of 45%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
The main thing to remember is that Surya Roshni has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 6.9% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.
If you want to know some of the risks facing Surya Roshni we’ve found 4 warning signs (1 shouldn’t be ignored!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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