Should You Be Impressed By Eimco Elecon (India)'s (NSE:EIMCOELECO) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Eimco Elecon (India) (NSE:EIMCOELECO), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Eimco Elecon (India), this is the formula:

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

0.0065 = ₹21m ÷ (₹3.5b - ₹220m) (Based on the trailing twelve months to June 2020).

So, Eimco Elecon (India) has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.8%.

See our latest analysis for Eimco Elecon (India)

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

What Can We Tell From Eimco Elecon (India)'s ROCE Trend?

When we looked at the ROCE trend at Eimco Elecon (India), we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 0.6%. 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 Key Takeaway

In summary, we're somewhat concerned by Eimco Elecon (India)'s diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Eimco Elecon (India) (including 1 which is is significant) .

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.

When trading Eimco Elecon (India) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.