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

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.

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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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