Under The Bonnet, D. P. Abhushan's (NSE:DPABHUSHAN) Returns Look Impressive

February 24, 2021

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in D. P. Abhushan's (NSE:DPABHUSHAN) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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)

0.31 = ₹418m ÷ (₹2.7b - ₹1.4b) (Based on the trailing twelve months to December 2020).

Therefore, D. P. Abhushan has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.

See our latest analysis for D. P. Abhushan

Historical performance is a great place to start when researching a stock so above you can see the gauge for D. P. Abhushan's ROCE against it's prior returns. If you'd like to look at how D. P. Abhushan has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

D. P. Abhushan is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. 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%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To sum it up, D. P. Abhushan has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 79% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing D. P. Abhushan we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

D. P. Abhushan is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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