If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Usha Martin (NSE:USHAMART) and its trend of ROCE, we really liked what we saw.
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 Usha Martin, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = ₹3.1b ÷ (₹27b - ₹7.0b) (Based on the trailing twelve months to March 2022).
Thus, Usha Martin 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 17%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Usha Martin's ROCE against it's prior returns. If you'd like to look at how Usha Martin 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
You'd find it hard not to be impressed with the ROCE trend at Usha Martin. The data shows that returns on capital have increased by 497% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Usha Martin appears to been achieving more with less, since the business is using 48% less capital to run its operation. Usha Martin may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Usha Martin has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Usha Martin's ROCE
In a nutshell, we're pleased to see that Usha Martin has been able to generate higher returns from less capital. Since the stock has returned a staggering 590% 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 Usha Martin can keep these trends up, it could have a bright future ahead.
If you want to continue researching Usha Martin, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.
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.