The Returns At Hindustan Composites (NSE:HINDCOMPOS) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Hindustan Composites (NSE:HINDCOMPOS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Hindustan Composites is:

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

0.035 = ₹331m ÷ (₹10b - ₹478m) (Based on the trailing twelve months to June 2022).

So, Hindustan Composites has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

Check out our latest analysis for Hindustan Composites

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hindustan Composites, check out these free graphs here.

What Does the ROCE Trend For Hindustan Composites Tell Us?

The returns on capital haven't changed much for Hindustan Composites in recent years. Over the past five years, ROCE has remained relatively flat at around 3.5% and the business has deployed 28% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Hindustan Composites' ROCE

In summary, Hindustan Composites has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Hindustan Composites does have some risks though, and we've spotted 2 warning signs for Hindustan Composites that you might be interested in.

While Hindustan Composites 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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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.