There are a few key trends to look for if we are to identify the next multi-bagger. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. With this in mind, the ROCE of Coromandel International (NSE: COROMANDEL) looks attractive right now, so let’s see what the yield trend can tell us.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Coromandel International, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.30 = 19b ÷ (₹ 112b – ₹ 49b) (Based on the last twelve months up to September 2021).
So, Coromandel International has a ROCE of 30%. It’s a fantastic return and not only that, it exceeds the 17% average earned by companies in a similar industry.
Discover our latest analysis for Coromandel International
Above you can see how Coromandel International’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
We would rather be satisfied with a return on capital like Coromandel International. Over the past five years, ROCE has remained relatively stable at around 30% and the company has deployed 114% more capital in its operations. Such returns are the envy of most companies and given that they have reinvested repeatedly at these rates, even better. If Coromandel International manages to maintain this pace, we would be very optimistic about its future.
In addition, Coromandel International has been successful in reducing current liabilities to 44% of total assets over the past five years. Indeed, suppliers now finance less of the activity, which can reduce certain elements of risk. While current liabilities are still 44%, some of that risk is still present.
The bottom line
Coromandel International has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted with. And the stock has performed incredibly well with a return of 226% over the past five years, so long-term investors are no doubt delighted with the result. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Coromandel International does involve certain risks, however, and we have identified 1 warning sign for Coromandel International that might interest you.
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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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