If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Therefore, when we briefly examined Safari Industries (India) (NSE:SAFARI) ROCE trend, we were very happy with what we saw.
What is return on capital employed (ROCE)?
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. The formula for this calculation on Safari Industries (India) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = ₹696m ÷ (₹4.7b – ₹1.4b) (Based on the last twelve months to June 2022).
Therefore, Safari Industries (India) posted a ROCE of 21%. This is a fantastic return and not only that, it exceeds the 14% average earned by companies in a similar industry.
Discover our latest analysis for Safari Industries (India)
In the chart above, we measured Safari Industries (India) past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is the ROCE trend of Safari Industries (India)?
It’s hard not to be impressed by the returns on capital of Safari Industries (India). The company has consistently gained 21% over the past five years and the capital employed within the company has increased by 217% over this period. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. You will see this when you look at well-run businesses or favorable business models.
One last thing to note, even though ROCE has remained relatively stable over the past five years, the reduction in current liabilities to 29% of total assets is good to see from a business owner’s perspective. Indeed, suppliers now finance the company less, which can reduce certain elements of risk.
In short, we would say that Safari Industries (India) has the makings of a multi-bagger as it has been able to compound its capital at very profitable rates of return. And the stock has done incredibly well, returning 185% over the past three years, so long-term investors are no doubt pleased with the result. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.
Like most businesses, Safari Industries (India) carries certain risks, and we have found 1 warning sign which you should be aware of.
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.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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