Rajesh Exports (NSE: RAJESHEXPO) reinvests at lower rates of return

Did you know that certain financial measures can provide clues about a potential multi-bagger? 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. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. That said, from the first glance at Rajesh exports (NSE: RAJESHEXPO) We are not jumping from our chairs on the yield trend, but taking a closer look.

Return on capital employed (ROCE): what is it?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Rajesh exports:

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

0.099 = 11b ÷ (₹ 194b – ₹ 84b) (Based on the last twelve months up to December 2020).

So, Rajesh Exports has a ROCE of 9.9%. Even though it is in line with the industry average of 9.6%, it is still a poor performance in itself.

See our latest review for Rajesh Exports

NSEI: RAJESHEXPO Return on capital employed June 22, 2021

In the graph above, we measured Rajesh Exports’ past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Rajesh Exports.

What the ROCE trend can tell us

On the surface, the ROCE trend at Rajesh Exports does not inspire confidence. To be more precise, ROCE has increased from 37% over the past five years. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. If these investments prove to be successful, it can bode very well for stock performance in the long run.

On a related note, Rajesh Exports reduced its current liabilities to 44% 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. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money. Keep in mind that 44% is still quite high, so these risks are still somewhat prevalent.

In conclusion…

In summary, despite lower returns in the short term, we are encouraged to see that Rajesh Exports is reinvesting for growth and therefore has higher sales. In this context, the stock has gained only 36% over the past five years. Therefore, we recommend that you dig deeper into this title to confirm if it is a good investment.

Rajesh Exports does come with some risks, however, and we have spotted 1 warning sign for Rajesh Exports that might interest you.

Although Rajesh Exports does not generate 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 material. Simply Wall St has no position in any of the stocks mentioned.
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