Has Centum Electronics (NSE:CENTUM) Got What It Takes To Become A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Centum Electronics (NSE:CENTUM), it does have a high ROCE right now, but lets see how returns are trending.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Centum Electronics, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = ₹739m ÷ (₹11b - ₹7.2b) (Based on the trailing twelve months to June 2020).

Thus, Centum Electronics has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Centum Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Centum Electronics' ROCE against it's prior returns. If you're interested in investigating Centum Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Centum Electronics doesn't inspire confidence. Historically returns on capital were even higher at 40%, but they have dropped over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Centum Electronics' current liabilities have increased over the last five years to 67% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 21%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Centum Electronics have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 50% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Centum Electronics, we've spotted 7 warning signs, and 1 of them is potentially serious.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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