India Nippon Electricals (NSE:INDNIPPON) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at India Nippon Electricals (NSE:INDNIPPON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. To calculate this metric for India Nippon Electricals, this is the formula:

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

0.10 = ₹705m ÷ (₹8.8b - ₹1.7b) (Based on the trailing twelve months to December 2024).

Thus, India Nippon Electricals has an ROCE of 10.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 15%.

View our latest analysis for India Nippon Electricals

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

The Trend Of ROCE

When we looked at the ROCE trend at India Nippon Electricals, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10.0% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for India Nippon Electricals. And long term investors must be optimistic going forward because the stock has returned a huge 214% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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

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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.