Tips Industries (NSE:TIPSINDLTD) Is Very Good At Capital Allocation

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Tips Industries' (NSE:TIPSINDLTD) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Tips Industries:

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

0.42 = ₹592m ÷ (₹1.5b - ₹68m) (Based on the trailing twelve months to March 2021).

Thus, Tips Industries has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 6.8%.

See our latest analysis for Tips Industries

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

The Trend Of ROCE

Tips Industries has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 323% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Tips Industries' ROCE

As discussed above, Tips Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 1,818% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Tips Industries can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Tips Industries, we've discovered 1 warning sign that 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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