The Trends At Bharat Wire Ropes (NSE:BHARATWIRE) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Bharat Wire Ropes (NSE:BHARATWIRE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. Analysts use this formula to calculate it for Bharat Wire Ropes:

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

0.022 = ₹71m ÷ (₹7.5b - ₹4.3b) (Based on the trailing twelve months to March 2020).

Thus, Bharat Wire Ropes has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.

See our latest analysis for Bharat Wire Ropes

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

How Are Returns Trending?

On the surface, the trend of ROCE at Bharat Wire Ropes doesn't inspire confidence. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 2.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 57%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Bharat Wire Ropes' ROCE

Bringing it all together, while we're somewhat encouraged by Bharat Wire Ropes' reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 79% over the last three years. Therefore based on the analysis done in this article, we don't think Bharat Wire Ropes has the makings of a multi-bagger.

Bharat Wire Ropes does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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