To find multi-bagger stock, what are the underlying trends we need to look for in a business? Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Therefore, when we briefly examined Carborundum Universal’s (NSE: CARBORUNIV) Trend ROCE, we were pretty happy with what we saw.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Carborundum Universal, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = 3.7b ÷ (₹ 27b – ₹ 4.7b) (Based on the last twelve months up to March 2021).
Therefore, Carborundum Universal has a ROCE of 16%. On its own, that’s standard efficiency, but it’s far better than the 12% generated by the machinery industry.
Check out our latest review for Carborundum Universal
In the graph above, we measured Carborundum Universal’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view the analysts’ forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
While current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively stable at around 16% and the company has deployed 65% additional capital in its operations. Given that 16% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Stable returns in this basic stage can be unattractive, but if they can be sustained over the long term, they often offer nice rewards for shareholders.
One more thing to note, although ROCE has remained relatively stable over the past five years, reducing current liabilities to 17% of total assets is good to see from a business owner’s perspective. Indeed, suppliers now finance less of the activity, which can reduce certain elements of risk.
The bottom line
The main thing to remember is that Carborundum Universal has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock rewarded shareholders with a remarkable 171% return for those who have held it in the past five years. So while the stock may be “more expensive” than it used to be, we believe that the solid fundamentals justify this stock for further research.
One more thing, we spotted 2 warning signs opposite Carborundum Universal that you might find interesting.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
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