Here's What To Make Of CMI's (NSE:CMICABLES) Returns On Capital

August 23, 2020

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating CMI (NSE:CMICABLES), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CMI is:

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

0.13 = ₹506m ÷ (₹7.0b - ₹3.2b) (Based on the trailing twelve months to March 2020).

Therefore, CMI has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Electrical industry.

Check out our latest analysis for CMI

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CMI has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at CMI, we didn't gain much confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 13%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, CMI has done well to pay down its current liabilities to 46% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From CMI's ROCE

In summary, we're somewhat concerned by CMI's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 78% during the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 6 warning signs with CMI (at least 3 which shouldn't be ignored) , and understanding these would certainly be useful.

While CMI isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade CMI, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

New: AI Stock Screener & Alerts

Our new AI Stock Screener scans the market every day to uncover opportunities.

• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies

Or build your own from over 50 metrics.

Explore Now for Free

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

mitchell_lawler

A landmark settlement is meant to punish Meta (META). If the 1998 tobacco deal is any guide, it might protect it.

118

zoe_vi5fn1d

Any moat with an opt-out clause for your competitors is just a fence around your own garden.

connor_iwn1g1d

Worth looking at what previous legal action actually did to Meta rather than reaching for tobacco. The FTC's record five billion dollar privacy fine in 2019 was met with the stock rising, because it came in below fears and removed an open question. GDPR was designed to constrain large platforms and increased their share of the European ad market, because compliance cost fell hardest on small intermediaries. The FTC's antitrust case, the one that could genuinely have broken the company up, was decided in Meta's favour last November. The only thing that ever meaningfully hurt the business was Apple changing a tracking default, and Meta out-spent that too, while the ad-tech firms that could not afford to rebuild disappeared. The pattern is not that Meta survives regulation. It is that regulation keeps costing its smaller competitors more.