Here is what is worrying about returns on capital of Dwarikesh Sugar Industries (NSE: DWARKESH)

What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. So during Dwarikesh sugar industries (NSE: DWARKESH) has a high ROCE right now, let’s see what we can decipher about the evolution of returns.

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 Dwarikesh Sugar Industries:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.23 = 1.7b ÷ (₹ 14b – ₹ 7.0b) (Based on the last twelve months up to June 2021).

Thereby, Dwarikesh Sugar Industries has a ROCE of 23%. In absolute terms, that’s a great return and it’s even better than the food industry average of 12%.

Check out our latest review for Dwarikesh Sugar Industries

Although the past is not representative 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 Dwarikesh Sugar Industries’ past, check out this free graph of past income, income and cash flow.

What does the ROCE trend of the Dwarikesh sugar industries tell us?

In terms of Dwarikesh Sugar Industries’ historic ROCE movements, the trend is not great. While it’s comforting that ROCE is high, it was 47% five years ago. Although, as income and the amount of assets used in the business have increased, this 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 to be successful, it can bode very well for stock performance in the long run.

On a related note, Dwarikesh Sugar Industries reduced its current liabilities to 48% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE. Keep in mind that 48% is still quite high, so these risks are still somewhat prevalent.

The bottom line

As returns have plummeted for Dwarikesh Sugar Industries lately, we are encouraged to see sales increasing and the company reinvesting in its operations. And long-term investors should be optimistic about the future, as the stock has returned 209% to shareholders in the past five years. So if these growth trends continue, we would be optimistic about the future of the title.

If you want to know more about Dwarikesh Sugar Industries we have spotted 3 warning signs, and 1 of them is potentially serious.

Dwarikesh Sugar Industries is not the only stock to generate high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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