Be Wary Of Menon Bearings (NSE:MENONBE) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Menon Bearings (NSE:MENONBE) 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)

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 Menon Bearings, this is the formula:

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

0.19 = ₹223m ÷ (₹1.5b - ₹382m) (Based on the trailing twelve months to December 2020).

Therefore, Menon Bearings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 8.8% it's much better.

See our latest analysis for Menon Bearings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Menon Bearings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 19% from 39% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Menon Bearings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Menon Bearings we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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