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There’s Been No Shortage Of Growth Recently For Niraj Cement Structurals’ (NSE:NIRAJ) Returns On Capital

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Niraj Cement Structurals (NSE:NIRAJ) so let’s look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Niraj Cement Structurals:

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

0.021 = ₹39m ÷ (₹3.1b – ₹1.3b) (Based on the trailing twelve months to June 2022).

Therefore, Niraj Cement Structurals has an ROCE of 2.1%. In absolute terms, that’s a low return and it also under-performs the Construction industry average of 10%.

Check out our latest analysis for Niraj Cement Structurals

roce
NSEI:NIRAJ Return on Capital Employed September 10th 2022

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 want to delve into the historical earnings, revenue and cash flow of Niraj Cement Structurals, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The figures show that over the last five years, returns on capital have grown by 348%. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it’s applying 28% less capital than it was five years ago. A business that’s shrinking its asset base like this isn’t usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that’s pretty high.

What We Can Learn From Niraj Cement Structurals’ ROCE

In the end, Niraj Cement Structurals has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 26% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we’ve spotted 2 warning signs facing Niraj Cement Structurals that you might find interesting.

While Niraj Cement Structurals 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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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