Returns On Capital - An Important Metric For D. P. Abhushan (NSE:DPABHUSHAN)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 D. P. Abhushan's (NSE:DPABHUSHAN) 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. The formula for this calculation on D. P. Abhushan is:

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

0.23 = ₹307m ÷ (₹2.7b - ₹1.4b) (Based on the trailing twelve months to March 2020).

Therefore, D. P. Abhushan has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

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.

How Are Returns Trending?

The trends we've noticed at D. P. Abhushan are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 23%. 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 99%. 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.

On a separate but related note, it's important to know that D. P. Abhushan has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From D. P. Abhushan's ROCE

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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last three years. In light of that, we think it's worth looking further into this stock because if D. P. Abhushan can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with D. P. Abhushan (including 1 which is is significant) .

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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