Here's What's Concerning About Menon Bearings' (NSE:MENONBE) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Menon Bearings (NSE:MENONBE) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 2 warning signs investors should be aware of before investing in Menon Bearings. Read for free now.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.17 = ₹286m ÷ (₹2.3b - ₹567m) (Based on the trailing twelve months to December 2024).

Thus, Menon Bearings has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 15%.

Check out 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'd like to look at how Menon Bearings has performed in the past in other metrics, you can view this free graph of Menon Bearings' past earnings, revenue and cash flow.

So How Is Menon Bearings' ROCE Trending?

When we looked at the ROCE trend at Menon Bearings, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Menon Bearings' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 287% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 2 warning signs facing Menon Bearings that you might find interesting.

While Menon Bearings 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.