The Return Trends At De Nora India (NSE:DENORA) Look Promising

Simply Wall St · 10/26 02:47

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at De Nora India (NSE:DENORA) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 De Nora India:

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

0.19 = ₹230m ÷ (₹1.3b - ₹70m) (Based on the trailing twelve months to June 2024).

Therefore, De Nora India has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 18% generated by the Electrical industry.

View our latest analysis for De Nora India

roce
NSEI:DENORA Return on Capital Employed October 26th 2024

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'd like to look at how De Nora India has performed in the past in other metrics, you can view this free graph of De Nora India's past earnings, revenue and cash flow.

How Are Returns Trending?

De Nora India has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. In addition to that, De Nora India is employing 122% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, De Nora India has decreased current liabilities to 5.5% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

Overall, De Nora India gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 497% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

On a final note, we've found 1 warning sign for De Nora India that we think you should be aware of.

While De Nora India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.