Here's What To Make Of Menon Bearings' (NSE:MENONBE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Menon Bearings (NSE:MENONBE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Menon Bearings is:

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).

Thus, Menon Bearings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Auto Components industry.

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're interested in investigating Menon Bearings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Menon Bearings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 39% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Menon Bearings' ROCE

In summary, Menon Bearings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Menon Bearings (of which 1 is a bit concerning!) that you should know about.

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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