The Returns At Honda India Power Products (NSE:HONDAPOWER) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Honda India Power Products (NSE:HONDAPOWER), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Honda India Power Products:

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

0.062 = ₹357m ÷ (₹7.2b - ₹1.4b) (Based on the trailing twelve months to June 2020).

So, Honda India Power Products has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.5%.

See our latest analysis for Honda India Power Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for Honda India Power Products' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Honda India Power Products, check out these free graphs here.

What Can We Tell From Honda India Power Products' ROCE Trend?

In terms of Honda India Power Products' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Honda India Power Products' ROCE

We're a bit apprehensive about Honda India Power Products because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Honda India Power Products that you might find interesting.

While Honda India Power Products may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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