Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with 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. Therefore, when we briefly examined Rupa’s (NSE:RUPA) ROCE trend, we were very pleased with what we saw.
What is return on capital employed (ROCE)?
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 Rupa, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.34 = ₹2.7b ÷ (₹14b – ₹5.7b) (Based on the last twelve months to December 2021).
So, Rupa has a ROCE of 34%. This is a fantastic return and not only that, it exceeds the 14% average earned by companies in a similar industry.
See our latest analysis for Rupa
Historical performance is a great starting point when researching a stock. So you can see Rupa’s ROCE gauge above against its past returns. If you want to investigate more about Rupa’s past, check out this free chart of past profits, revenue and cash flow.
So what is Rupa’s ROCE trend?
Rupa deserves credit for his comebacks. The company has consistently gained 34% over the past five years and the capital employed within the company has increased by 92% over this period. Now considering the ROCE is an attractive 34%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. You will see this when you look at well-run businesses or favorable business models.
On a separate but related note, it is important to know that Rupa has a current liabilities to total assets ratio of 41%, which we would consider quite high. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
In short, we would say that Rupa has the makings of a multi-bagger as he has been able to compound his capital at very profitable rates of return. And the stock has followed suit, returning 65% to shareholders over the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
If you want to further research Rupa, you might be interested to know more about the 1 warning sign that our analysis found.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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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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