What trends should we look for if we want to identify stocks that can multiply in value over the long term? Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. In light of this, when we looked Trust Industries (NSE:RELIANCE) and its ROCE trend, we weren’t exactly thrilled.
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. The formula for this calculation on Reliance Industries is as follows:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.066 = ₹730b ÷ (₹14t – ₹3.2t) (Based on the last twelve months to December 2021).
So, Reliance Industries posted a ROCE of 6.6%. Ultimately, that’s a weak return, and it’s below the oil and gas industry average of 9.9%.
See our latest analysis for Reliance Industries
Above, you can see how Reliance Industries’ current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts are predicting for the future, you should check out our free report for Reliance Industries.
What the ROCE trend can tell us
In terms of Reliance Industries historical ROCE movements, the trend is not fantastic. To be more specific, ROCE has fallen by 8.3% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.
The Key Takeaway
Even though capital returns have fallen in the short term, we think it’s promising that both revenue and capital employed have increased for Reliance Industries. And the stock has done incredibly well with a 295% return over the past five years, so long-term investors are no doubt pleased with this result. So while investors seem to be recognizing these promising trends, we would be looking further into this stock to make sure the other metrics justify the positive view.
If you want to further research Reliance Industries, you may be interested to know the 2 warning signs that our analysis found.
Although Reliance Industries does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list 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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