Is There More Growth In Store For Hindusthan National Glass & Industries' (NSE:HINDNATGLS) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hindusthan National Glass & Industries (NSE:HINDNATGLS) so let's look a bit deeper.

What is 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 Hindusthan National Glass & Industries:

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

0.05 = ₹604m ÷ (₹32b - ₹20b) (Based on the trailing twelve months to June 2020).

Thus, Hindusthan National Glass & Industries has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

See our latest analysis for Hindusthan National Glass & Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hindusthan National Glass & Industries' ROCE against it's prior returns. If you'd like to look at how Hindusthan National Glass & Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the ROCE is still rather low for Hindusthan National Glass & Industries, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 541%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 52% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 62% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Hindusthan National Glass & Industries' ROCE

In a nutshell, we're pleased to see that Hindusthan National Glass & Industries has been able to generate higher returns from less capital. And since the stock has fallen 69% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Hindusthan National Glass & Industries does come with some risks, and we've found 2 warning signs that you should be aware of.

While Hindusthan National Glass & Industries 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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