Endurance Technologies (NSE:ENDURANCE) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Endurance Technologies (NSE:ENDURANCE) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Endurance Technologies:

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

0.14 = ₹5.8b ÷ (₹59b - ₹17b) (Based on the trailing twelve months to March 2022).

Thus, Endurance Technologies has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Auto Components industry.

See our latest analysis for Endurance Technologies

Above you can see how the current ROCE for Endurance Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Endurance Technologies.

So How Is Endurance Technologies' ROCE Trending?

In terms of Endurance Technologies' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 22% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Endurance Technologies has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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 Bottom Line On Endurance Technologies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Endurance Technologies. In light of this, the stock has only gained 36% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Endurance Technologies does have some risks though, and we've spotted 1 warning sign for Endurance Technologies that you might be interested in.

While Endurance Technologies 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.