Saregama India (NSE:SAREGAMA): Are Investors Overlooking Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Saregama India (NSE:SAREGAMA) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Saregama India is:

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

0.20 = ₹1.1b ÷ (₹7.4b - ₹1.8b) (Based on the trailing twelve months to December 2020).

Therefore, Saregama India has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 8.4%.

See our latest analysis for Saregama India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saregama India's ROCE against it's prior returns. If you're interested in investigating Saregama India's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Saregama India is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 20%. 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 218%. 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.

The Bottom Line

All in all, it's terrific to see that Saregama India is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 560% 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 Saregama India can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Saregama India that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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