Vaswani Industries (NSE:VASWANI) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Vaswani Industries (NSE:VASWANI) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Vaswani Industries is:

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

0.14 = ₹162m ÷ (₹2.0b - ₹794m) (Based on the trailing twelve months to June 2021).

Therefore, Vaswani Industries has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Metals and Mining industry.

See our latest analysis for Vaswani Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vaswani Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Vaswani Industries, check out these free graphs here.

What Can We Tell From Vaswani Industries' ROCE Trend?

Vaswani Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 14%. 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 27%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Vaswani Industries' current liabilities are still rather high at 40% 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.

Our Take On Vaswani Industries' 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 Vaswani Industries has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Vaswani Industries that you might find interesting.

While Vaswani Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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