If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Banco Products (India) (NSE:BANCOINDIA) so let’s look a bit deeper.
Return On Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Banco Products (India) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = ₹1.6b ÷ (₹11b – ₹2.8b) (Based on the trailing twelve months to December 2020).
Thus, Banco Products (India) has an ROCE of 18%. On its own, that’s a standard return, however it’s much better than the 8.7% generated by the Auto Components industry.
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’re interested in investigating Banco Products (India)’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Banco Products (India) Tell Us?
Banco Products (India) has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 56% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
What We Can Learn From Banco Products (India)’s ROCE
As discussed above, Banco Products (India) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 69% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
If you want to know some of the risks facing Banco Products (India) we’ve found 2 warning signs (1 is significant!) that you should be aware of before investing here.
While Banco Products (India) isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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