Capital investment trends at Polycab India (NSE: POLYCAB) appear solid

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. With this in mind, the ROCE of Polycab India (NSE:POLYCAB) looks attractive right now, so let’s see what the yield trend can tell us.

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. To calculate this metric for Polycab India, here is the formula:

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

0.20 = ₹10b ÷ (₹70b – ₹19b) (Based on the last twelve months to December 2021).

So, Polycab India has a ROCE of 20%. In absolute terms, this is excellent performance and even better than the electrical industry average of 13%.

Check out our latest analysis for Polycab India

NSEI: POLYCAB Return on Capital Employed February 8, 2022

In the chart above, we measured Polycab India’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

The ROCE trend

Polycab India is to be commended for its yields. The company has consistently gained 20% over the past five years and the capital employed within the company has increased by 145% over this period. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.

One last thing to note, even though ROCE has remained relatively stable over the past five years, the reduction in current liabilities to 27% of total assets is good to see from a business owner’s perspective. Indeed, suppliers now finance the company less, which can reduce certain elements of risk.

The essential

In summary, we are pleased to see that Polycab India has accrued returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And the stock has followed suit, returning 83% to shareholders over the past year. So while investors seem to recognize these promising trends, we still think the stock warrants further research.

On a separate note, we found 2 warning signs for Polycab India you will probably want to know more.

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.