We Like These Underlying Trends At Usha Martin (NSE:USHAMART)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Usha Martin (NSE:USHAMART) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Usha Martin, this is the formula:

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

0.09 = ₹1.6b ÷ (₹25b - ₹7.9b) (Based on the trailing twelve months to December 2020).

Thus, Usha Martin has an ROCE of 9.0%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.

See our latest analysis for Usha Martin

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 want to delve into the historical earnings, revenue and cash flow of Usha Martin, check out these free graphs here.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Usha Martin. The figures show that over the last five years, returns on capital have grown by 217%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 59% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 31%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In a nutshell, we're pleased to see that Usha Martin has been able to generate higher returns from less capital. And a remarkable 267% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 3 warning signs facing Usha Martin that you might find interesting.

While Usha Martin 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. 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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