Returns On Capital Signal Tricky Times Ahead For Federal-Mogul Goetze (India) (NSE:FMGOETZE)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Federal-Mogul Goetze (India) (NSE:FMGOETZE), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Federal-Mogul Goetze (India):

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

0.0068 = ₹61m ÷ (₹12b - ₹2.8b) (Based on the trailing twelve months to December 2020).

So, Federal-Mogul Goetze (India) has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.6%.

View our latest analysis for Federal-Mogul Goetze (India)

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

How Are Returns Trending?

When we looked at the ROCE trend at Federal-Mogul Goetze (India), we didn't gain much confidence. To be more specific, ROCE has fallen from 14% 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.

On a related note, Federal-Mogul Goetze (India) has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. 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 Federal-Mogul Goetze (India)'s ROCE

We're a bit apprehensive about Federal-Mogul Goetze (India) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 12% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Federal-Mogul Goetze (India) (1 shouldn't be ignored) you should be aware of.

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.

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