Is Federal-Mogul Goetze (India) (NSE:FMGOETZE) Likely To Turn Things Around?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Federal-Mogul Goetze (India) (NSE:FMGOETZE) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Federal-Mogul Goetze (India):

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

0.079 = ₹741m ÷ (₹12b - ₹2.5b) (Based on the trailing twelve months to December 2019).

So, Federal-Mogul Goetze (India) has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

View our latest analysis for Federal-Mogul Goetze (India)

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

How Are Returns Trending?

On the surface, the trend of ROCE at Federal-Mogul Goetze (India) doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. 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 related note, Federal-Mogul Goetze (India) has decreased its current liabilities to 21% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Federal-Mogul Goetze (India) have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 14% in 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.

On a final note, we've found 2 warning signs for Federal-Mogul Goetze (India) that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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