Birla (NSE: BIRLACORPN) returns on capital increase
If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends to watch out for. Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the company amount capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits into the business and generating higher returns. So when we looked Birla (NSE: BIRLACORPN) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Birla is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.089 = ₹ 9.7 billion ÷ (₹ 129 billion – ₹ 20 billion) (Based on the last twelve months up to March 2021).
Therefore, Birla has a ROCE of 8.9%. In absolute terms, this is a poor performance and it also underperforms the basic materials industry average by 13%.
Check out our latest review for Birla
Above you can see how Birla’s current ROCE compares to her past returns on capital, but you can’t say more about the past. If you like, you can check out the analysts’ forecasts covering Birla here for free.
The ROCE trend
We are happy to see that the ROCE is heading in the right direction, although it is still weak at the moment. Over the past five years, return on capital employed has increased significantly to 8.9%. The amount of capital employed also increased by 152%. This may indicate that there are many opportunities to invest capital in-house and at ever higher rates, a common combination among multiple baggers.
The key to take away
Overall, it’s great to see that Birla is reaping the rewards of past investments and growing her capital base. Given that the stock has returned an incredible 212% to shareholders over the past five years, it looks like investors are recognizing these changes. In light of this, we think it’s worth taking a closer look at this title, because if Birla can maintain these trends, he could have a bright future.
One more thing to note, we have identified 2 warning signs with Birla and understanding this should be part of your investment process.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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