Shareholders of Pitti Engineering (NSE: PITTIENG) will want the ROCE trajectory to continue

If we are to find a title that could multiply in the long run, what are the underlying trends that we need to look for? Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. Speaking of which, we have noticed some big changes in Pitti Engineering (NSE: PITTIENG) return on capital, so let’s take a look.

What is Return on Employee Capital (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Pitti Engineering:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.13 = ₹ 408m ÷ (₹ 6.6b – ₹ 3.5b) (Based on the last twelve months up to December 2020).

So, Pitti Engineering has a ROCE of 13%. This is a relatively normal return on capital, and it is around the 11% generated by the electrical industry.

See our latest review for Pitti Engineering

Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Pitti Engineering’s ROCE compared to its past yields. If you want to take a look at Pitti Engineering’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.

What the ROCE trend can tell us

Investors would be delighted with what is happening at Pitti Engineering. Over the past five years, returns on capital employed have increased substantially to 13%. The amount of capital employed also increased by 102%. So we are very inspired by what we see at Pitti Engineering through its ability to reinvest capital profitably.

On a separate but related note, it’s important to know that Pitti Engineering has a current liabilities to total assets ratio of 52%, which we consider to be quite high. This can lead to some risk as the business is basically operating with quite a lot of dependence on its suppliers or other types of short term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.

The result on the ROCE of Pitti Engineering

To sum up, Pitti Engineering has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. And with the stock having performed exceptionally well over the past five years, these trends are being taken into account by investors. In light of this, we think it is worth taking a closer look at this title because if Pitti Engineering can maintain these trends, it could have a bright future ahead of it.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 4 warning signs for Pitti Engineering (1 of which cannot be ignored!) that you should know.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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