Investors Should Be Encouraged By D. P. Abhushan's (NSE:DPABHUSHAN) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of D. P. Abhushan (NSE:DPABHUSHAN) we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for D. P. Abhushan:

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

0.36 = ₹766m ÷ (₹4.1b - ₹2.0b) (Based on the trailing twelve months to June 2023).

Thus, D. P. Abhushan has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for D. P. Abhushan

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 want to delve into the historical earnings, revenue and cash flow of D. P. Abhushan, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at D. P. Abhushan. The data shows that returns on capital have increased substantially over the last five years to 36%. 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 81%. So we're very much inspired by what we're seeing at D. P. Abhushan thanks to its ability to profitably reinvest capital.

On a side note, D. P. Abhushan's current liabilities are still rather high at 48% 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.

In Conclusion...

In summary, it's great to see that D. P. Abhushan can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 1,299% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

D. P. Abhushan does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.