Indian Railway Catering & Tourism (NSE: IRCTC) could become a composing machine

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Generally, we will want to notice a growing trend to return to on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So when we looked through our eyes Indian Railways Catering and Tourism (NSE: IRCTC) trend of ROCE, we really liked what we saw.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Indian Railway Catering & Tourism, here is the formula:

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

0.28 = ₹ 5.1b ÷ (₹ 34b – ₹ 15b) (Based on the last twelve months up to September 2021).

Thereby, Indian Railway Catering & Tourism has a ROCE of 28%. In absolute terms, this is a great performance and is even better than the commercial services industry average of 8.6%.

Check out our latest review for Indian Railway Catering & Tourism

NSEI: IRCTC Return on capital employed on January 9, 2022

Above you can see how Indian Railway Catering & Tourism’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Indian Railway Catering & Tourism.

So what is the ROCE trend of Indian Railways Catering and Tourism?

Indian Railway Catering & Tourism is to be commended for its feedback. The company has steadily gained 28% over the past five years and the capital employed within the company has increased by 108% during this period. Such returns are the envy of most companies and given that they have reinvested repeatedly at these rates, even better. If Indian Railway Catering & Tourism can keep up this pace, we would be very optimistic about its future.

On the other hand, Indian Railway Catering & Tourism’s current liabilities are still quite high at 46% of total assets. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.

In conclusion…

In short, we would say Indian Railway Catering & Tourism has the makings of a multi-bagger since it was able to build up its capital at very profitable rates of return. On top of that, the stock rewarded shareholders with a remarkable 193% return for those who have owned over the past year. So while the stock may be “more expensive” than it was before, we believe that the strong fundamentals warrant further research into this stock.

On a final note, we found 1 warning sign for Indian Railway Catering & Tourism that we think you should be aware of.

If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.

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 any stock 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 any of the stocks mentioned.

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