If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sanghi Industries (NSE:SANGHIIND), we don’t think it’s current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sanghi Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.042 = ₹1.3b ÷ (₹38b – ₹7.9b) (Based on the trailing twelve months to March 2022).
Thus, Sanghi Industries has an ROCE of 4.2%. In absolute terms, that’s a low return and it also under-performs the Basic Materials industry average of 9.8%.
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 Sanghi Industries, check out these free graphs here.
How Are Returns Trending?
In terms of Sanghi Industries’ historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 7.3%, but since then they’ve fallen to 4.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Sanghi Industries’ ROCE
In summary, despite lower returns in the short term, we’re encouraged to see that Sanghi Industries is reinvesting for growth and has higher sales as a result. These growth trends haven’t led to growth returns though, since the stock has fallen 58% over the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 4 warning signs we’ve spotted with Sanghi Industries (including 2 which don’t sit too well with us) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.