If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that the company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Everest Industries (NSE: EVERESTIND) looks quite promising in regards to its Trends of return on capital.
What is 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. The formula for this calculation on Everest Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = ₹ 658m ÷ (₹ 9.4b – ₹ 3.9b) (Based on the trailing twelve months to December 2021).
Therefore, Everest Industries has an ROCE of 12%. In isolation, that’s a pretty standard return but against the Building industry average of 17%, it’s not as good.
See our latest analysis for Everest Industries
While the past is not representative of the future, it can be helpful to know how the company has performed historically, which is why we have this chart above. If you’d like to look at how Everest 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 Everest Industries’ ROCE Trend?
Everest Industries is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 87% 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. It’s worth looking Deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to Invest internally for the organic growth are lacking.
Another thing to note, Everest Industries has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
As discussed above, Everest Industries 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 staggering 264% to shareholders over the last five years, it looks like investors are recognizing 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.
On a final note, we’ve found 2 warning signs for Everest Industries that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.