Investors Should Be Encouraged By Sahaj Solar's (NSE:SAHAJSOLAR) Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Sahaj Solar's (NSE:SAHAJSOLAR) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sahaj Solar:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = ₹273m ÷ (₹1.5b - ₹640m) (Based on the trailing twelve months to September 2024).
Therefore, Sahaj Solar has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Machinery industry average of 15%.
See our latest analysis for Sahaj Solar
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sahaj Solar.
What Can We Tell From Sahaj Solar's ROCE Trend?
Sahaj Solar is displaying some positive trends. The data shows that returns on capital have increased substantially over the last three years to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 469% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 41%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Our Take On Sahaj Solar's ROCE
All in all, it's terrific to see that Sahaj Solar is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 43% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to know some of the risks facing Sahaj Solar we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.
Sahaj Solar is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.