Returns On Capital - An Important Metric For Thangamayil Jewellery (NSE:THANGAMAYL)

What trends should we look for it we want to identify stocks that can 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. So when we looked at the ROCE trend of Thangamayil Jewellery (NSE:THANGAMAYL) we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Thangamayil Jewellery, this is the formula:

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

0.33 = ₹1.1b ÷ (₹7.0b - ₹3.6b) (Based on the trailing twelve months to September 2020).

Therefore, Thangamayil Jewellery has an ROCE of 33%. 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 Thangamayil Jewellery

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'd like to look at how Thangamayil Jewellery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Investors would be pleased with what's happening at Thangamayil Jewellery. Over the last five years, returns on capital employed have risen substantially to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 70% more capital is being employed now too. So we're very much inspired by what we're seeing at Thangamayil Jewellery thanks to its ability to profitably reinvest capital.

Another thing to note, Thangamayil Jewellery has a high ratio of current liabilities to total assets of 52%. 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.

In Conclusion...

In summary, it's great to see that Thangamayil Jewellery 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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 5 warning signs with Thangamayil Jewellery (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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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