Has Menon Bearings (NSE:MENONBE) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Menon Bearings (NSE:MENONBE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Menon Bearings:

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

0.17 = ₹193m ÷ (₹1.5b - ₹382m) (Based on the trailing twelve months to September 2020).

Therefore, Menon Bearings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 5.8% it's much better.

Check out our latest analysis for Menon Bearings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Menon Bearings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Menon Bearings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Menon Bearings, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 17%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Menon Bearings' ROCE

In summary, we're somewhat concerned by Menon Bearings' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 24% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Menon Bearings does have some risks though, and we've spotted 2 warning signs for Menon Bearings that you might be interested in.

While Menon Bearings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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