Returns On Capital At Bharat Bijlee (NSE:BBL) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Bharat Bijlee (NSE:BBL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Bharat Bijlee is:

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

0.061 = ₹1.5b ÷ (₹30b - ₹5.6b) (Based on the trailing twelve months to December 2024).

So, Bharat Bijlee has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 19%.

View 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 covering Bharat Bijlee's past earnings, revenue and cash flow.

What Can We Tell From Bharat Bijlee's ROCE Trend?

The returns on capital haven't changed much for Bharat Bijlee in recent years. The company has employed 188% more capital in the last five years, and the returns on that capital have remained stable at 6.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 19% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Bharat Bijlee's ROCE

Long story short, while Bharat Bijlee has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 945% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Bharat Bijlee does have some risks though, and we've spotted 1 warning sign for Bharat Bijlee that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.