The Returns At Hi-Tech Gears (NSE:HITECHGEAR) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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 Hi-Tech Gears (NSE:HITECHGEAR), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hi-Tech Gears is:

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

0.098 = ₹592m ÷ (₹9.9b - ₹3.8b) (Based on the trailing twelve months to March 2023).

Thus, Hi-Tech Gears has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 13%.

Check out our latest analysis for Hi-Tech Gears

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

So How Is Hi-Tech Gears' ROCE Trending?

Over the past five years, Hi-Tech Gears' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Hi-Tech Gears to be a multi-bagger going forward.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 39% of total assets, this reported ROCE would probably be less than9.8% because total capital employed would be higher.The 9.8% ROCE could be even lower if current liabilities weren't 39% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Hi-Tech Gears' ROCE

In a nutshell, Hi-Tech Gears has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. Therefore based on the analysis done in this article, we don't think Hi-Tech Gears has the makings of a multi-bagger.

Hi-Tech Gears does have some risks, we noticed 5 warning signs (and 3 which are significant) we think you should know about.

While Hi-Tech Gears 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.