What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Manaksia Coated Metals & Industries’ (NSE:MANAKCOAT) returns on capital, so let’s have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Manaksia Coated Metals & Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.088 = ₹190m ÷ (₹4.0b – ₹1.8b) (Based on the trailing twelve months to September 2020).
Thus, Manaksia Coated Metals & Industries has an ROCE of 8.8%. On its own, that’s a low figure but it’s around the 9.5% average generated by the Metals and Mining industry.
Check out our latest analysis for Manaksia Coated Metals & Industries
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’d like to look at how Manaksia Coated Metals & Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Manaksia Coated Metals & Industries’ ROCE Trend?
The fact that Manaksia Coated Metals & Industries is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Manaksia Coated Metals & Industries is utilizing 99% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a separate but related note, it’s important to know that Manaksia Coated Metals & Industries has a current liabilities to total assets ratio of 46%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Manaksia Coated Metals & Industries’ ROCE
Overall, Manaksia Coated Metals & Industries gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 22% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing: We’ve identified 4 warning signs with Manaksia Coated Metals & Industries (at least 2 which are potentially serious) , and understanding these would certainly be useful.
While Manaksia Coated Metals & Industries may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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