We Think Tips Industries (NSE:TIPSINDLTD) Might Have The DNA Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Tips Industries' (NSE:TIPSINDLTD) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tips Industries, this is the formula:

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

0.49 = ₹840m ÷ (₹1.9b - ₹203m) (Based on the trailing twelve months to September 2021).

So, Tips Industries has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 2.8%.

See our latest analysis for Tips Industries

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're interested in investigating Tips Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tips Industries' ROCE Trending?

The trends we've noticed at Tips Industries are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 49%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. So we're very much inspired by what we're seeing at Tips Industries thanks to its ability to profitably reinvest capital.

One more thing to note, Tips Industries has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To sum it up, Tips Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 1 warning sign facing Tips Industries that you might find interesting.

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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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.