What trends should we look for if we are to identify stocks that can multiply in value over the long term? Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked through our eyes Everready Industries India (NSE: EVEREADY) trend from ROCE, we really liked what we saw.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Eveready Industries India is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.44 = 2.2b ÷ (₹ 10b – ₹ 5.2b) (Based on the last twelve months up to June 2021).
So, Eveready Industries India has a ROCE of 44%. In absolute terms, this is a great performance and it’s even better than the household products industry average of 17%.
See our latest analysis for Eveready Industries India
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Eveready Industries India’s ROCE compared to its past returns. If you want to further explore the past of Everready Industries India, check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
It’s hard not to be impressed with Eveready Industries India’s returns on capital. The company has steadily gained 44% over the past five years, and the capital employed within the company has increased by 74% during this period. Now that the ROCE is attractive at 44%, this combination is actually quite attractive because it means that the company can constantly put money in to work and generate those high returns. If these trends can continue, it wouldn’t surprise us if the company were to become a multi-bagger.
Another thing to note, Eveready Industries India has a high ratio of current liabilities to total assets of 52%. This can lead to some risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
The key to take away
In summary, we are delighted to see that Eveready Industries India has compounded returns by reinvesting at consistently high rates of return as these are common characteristics of a multi-bagger. In light of this, the stock has only gained 38% over the past five years for shareholders who held the stock during that time. So, due to the trends we’re seeing, we recommend that you take a closer look at this stock to see if it has the makings of a multi-bagger.
If you want to know more about Eveready Industries India, we have spotted 2 warning signs, and 1 of them is a bit disturbing.
Eveready Industries India is not the only stock to generate high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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