Thangamayil Jewellery (NSE:THANGAMAYL) Is Investing Its Capital With Increasing Efficiency

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, the ROCE of Thangamayil Jewellery (NSE:THANGAMAYL) looks great, so lets see what the trend can tell us.

Understanding 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 Thangamayil Jewellery is:

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

0.37 = ₹2.0b ÷ (₹12b - ₹7.0b) (Based on the trailing twelve months to June 2023).

Thus, Thangamayil Jewellery has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

View our latest analysis for Thangamayil Jewellery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Thangamayil Jewellery's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Thangamayil Jewellery, check out these free graphs here.

So How Is Thangamayil Jewellery's ROCE Trending?

We like the trends that we're seeing from Thangamayil Jewellery. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 170% 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 57%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Thangamayil Jewellery's ROCE

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. In light of that, we think it's worth looking further into this stock because if Thangamayil Jewellery can keep these trends up, it could have a bright future ahead.

Thangamayil Jewellery does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.