Thangamayil Jewellery (NSE:THANGAMAYL) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Thangamayil Jewellery's (NSE:THANGAMAYL) returns on capital, so let's have a look.

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 Thangamayil Jewellery:

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

0.35 = ₹1.3b ÷ (₹7.7b - ₹4.1b) (Based on the trailing twelve months to June 2021).

Thus, Thangamayil Jewellery has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See 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.

What Does the ROCE Trend For Thangamayil Jewellery Tell Us?

Thangamayil Jewellery is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 35%. The amount of capital employed has increased too, by 89%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Thangamayil Jewellery has a high ratio of current liabilities to total assets of 53%. 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.

Our Take On Thangamayil Jewellery's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Thangamayil Jewellery has. Since the stock has returned a staggering 427% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Thangamayil Jewellery does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.