Here's What To Make Of Hindustan Composites' (NSE:HINDCOMPOS) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Hindustan Composites (NSE:HINDCOMPOS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hindustan Composites, this is the formula:

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

0.033 = ₹319m ÷ (₹10.0b - ₹469m) (Based on the trailing twelve months to March 2023).

So, Hindustan Composites has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

View our latest analysis for Hindustan Composites

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

How Are Returns Trending?

In terms of Hindustan Composites' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.3% for the last five years, and the capital employed within the business has risen 21% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, Hindustan Composites has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 17% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 2 warning signs for Hindustan Composites that we think you should be aware of.

While Hindustan Composites 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.