What are the early trends to look for to identify a stock that could multiply in value over the long term? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we ran our eyes 20 micron’ (NSE:20MICRONS) ROCE trend, 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 “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for 20 Microns:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = ₹621m ÷ (₹4.6b – ₹1.8b) (Based on the last twelve months to September 2021).
So, 20 Microns has a ROCE of 22%. This is a fantastic return and not only that, it exceeds the 18% average earned by companies in a similar industry.
Discover our latest analysis for 20 microns
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate the past of 20 microns further, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of 20 Microns?
20 micron is to be commended for its yields. Over the past five years, ROCE has remained relatively stable at around 22% and the company has deployed 46% more capital into its operations. Now considering the ROCE is an attractive 22%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Our view on 20 micron ROCE
Ultimately, the company has proven that it can reinvest its capital at high rates of return, which you’ll recall is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable return of 103% for those who have held it over the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
If you would like to further research 20 micron, you may be interested in learning more about the 3 warning signs that our analysis found.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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