RHI Magnesita India (NSE:RHIM) knows how to allocate capital
If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the 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 looked at ROCE trends at RHI Magnesita India (NSE: RHIM), we liked 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. Analysts use this formula to calculate it for RHI Magnesita India:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.37 = ₹3.9b ÷ (₹17b – ₹6.1b) (Based on the last twelve months to June 2022).
So, RHI Magnesita India has a ROCE of 37%. This is a fantastic return and not only that, it exceeds the 10% average earned by companies in a similar industry.
See our latest analysis for RHI Magnesita India
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about RHI Magnesita India’s past, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of RHI Magnesita India?
We would rather be happy with capital returns like RHI Magnesita India. The company has employed 289% more capital over the past five years, and the return on that capital has remained stable at 37%. Now considering that the ROCE is an attractive 37%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. You will see this when you look at well-run businesses or favorable business models.
On another note, while the change in ROCE trend may not attract attention, it is interesting to note that current liabilities have actually increased over the past five years. This is intriguing because if current liabilities had not increased to 36% of total assets, this reported ROCE would likely be lower at 37% because total capital employed would be higher. The ROCE of 37% could be even lower if current liabilities were not 36% of total assets, as the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, it introduces new elements of risk.
The Key Takeaway
In summary, we are pleased to see that RHI Magnesita India has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And the stock has done incredibly well with a 301% return over the past five years, so long-term investors are no doubt pleased with this result. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
Like most businesses, RHI Magnesita India carries certain risks, and we have found 1 warning sign which you should be aware of.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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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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