Returns On Capital Are A Standout For PG Electroplast (NSE:PGEL)

Simply Wall St · 10/18 06:45

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in PG Electroplast's (NSE:PGEL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for PG Electroplast:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.20 = ₹2.8b ÷ (₹23b - ₹9.6b) (Based on the trailing twelve months to June 2024).

Thus, PG Electroplast has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for PG Electroplast

roce
NSEI:PGEL Return on Capital Employed October 18th 2024

In the above chart we have measured PG Electroplast's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for PG Electroplast .

What Can We Tell From PG Electroplast's ROCE Trend?

We like the trends that we're seeing from PG Electroplast. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 503%. So we're very much inspired by what we're seeing at PG Electroplast thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that PG Electroplast has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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 On PG Electroplast's ROCE

To sum it up, PG Electroplast has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

PG Electroplast does have some risks though, and we've spotted 1 warning sign for PG Electroplast that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.