Bharat Bijlee (NSE:BBL) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Bharat Bijlee (NSE:BBL) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Bharat Bijlee is:

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

0.042 = ₹339m ÷ (₹12b - ₹3.5b) (Based on the trailing twelve months to December 2020).

So, Bharat Bijlee has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 11%.

See our latest analysis for Bharat Bijlee

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bharat Bijlee's ROCE against it's prior returns. If you're interested in investigating Bharat Bijlee's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Bharat Bijlee has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Bharat Bijlee is utilizing 203% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Bharat Bijlee has decreased current liabilities to 31% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Bharat Bijlee has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Bharat Bijlee's ROCE

Long story short, we're delighted to see that Bharat Bijlee's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 11% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Bharat Bijlee does come with some risks, and we've found 2 warning signs that you should be aware of.

While Bharat Bijlee 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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