Sandesh (NSE:SANDESH) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sandesh (NSE:SANDESH), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Sandesh:

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

0.12 = ₹1.2b ÷ (₹10b - ₹601m) (Based on the trailing twelve months to March 2022).

Thus, Sandesh has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Media industry.

Check out our latest analysis for Sandesh

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

What Can We Tell From Sandesh's ROCE Trend?

In terms of Sandesh's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Sandesh's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sandesh. These trends are starting to be recognized by investors since the stock has delivered a 3.4% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Sandesh does come with some risks, and we've found 1 warning sign that you should be aware of.

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

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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.