What trends should we look for if we are to identify stocks that can multiply in value over the long term? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after investigation Sandesh (NSE: SANDESH), we don’t think current trends fit the mold of a multi-bagger.
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. To calculate this metric for Sandesh, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.13 = 1.2b Ã· (â¹ 9.6b – â¹ 693m) (Based on the last twelve months up to March 2021).
Therefore, Sandesh has a ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 12% generated by the media industry.
See our latest review for Sandesh
Historical performance is a great place to start when researching a stock, so above you can see the gauge of Sandesh’s ROCE against its past returns. If you want to take a look at Sandesh’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.
What can we say about Sandesh’s ROCE trend?
On the surface, the ROCE trend at Sandesh does not inspire confidence. About five years ago, returns on capital were 21%, but since then they have fallen to 13%. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
The bottom line
To conclude, we found that Sandesh is reinvesting in the business, but the returns are declining. Unsurprisingly, the stock has only gained 25% over the past five years, potentially indicating that investors are taking this into account in the future. Therefore, if you are looking for a multi-bagger, we think you would have better luck elsewhere.
Sandesh does have some risks, though, and we’ve spotted 2 warning signs for Sandesh that might interest you.
While Sandesh doesn’t earn the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. 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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