There Are Reasons To Feel Uneasy About Hi-Tech Gears' (NSE:HITECHGEAR) Returns On Capital

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. Although, when we looked at Hi-Tech Gears (NSE:HITECHGEAR), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Hi-Tech Gears is:

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

0.063 = ₹406m ÷ (₹10b - ₹3.7b) (Based on the trailing twelve months to December 2021).

Therefore, Hi-Tech Gears has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

See 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're interested in investigating Hi-Tech Gears' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hi-Tech Gears' ROCE Trend?

In terms of Hi-Tech Gears' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.3% from 14% 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hi-Tech Gears. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Hi-Tech Gears does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Hi-Tech Gears 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.