Investors Should Be Encouraged By Bharat Electronics' (NSE:BEL) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Bharat Electronics' (NSE:BEL) returns on capital, so let's have a look.

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

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. Analysts use this formula to calculate it for Bharat Electronics:

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

0.22 = ₹34b ÷ (₹335b - ₹184b) (Based on the trailing twelve months to September 2022).

Thus, Bharat Electronics has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Aerospace & Defense industry average of 12%.

View our latest analysis for Bharat Electronics

Above you can see how the current ROCE for Bharat Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Bharat Electronics' ROCE Trending?

The trends we've noticed at Bharat Electronics are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 68% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Bharat Electronics has a high ratio of current liabilities to total assets of 55%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Bharat Electronics' ROCE

To sum it up, Bharat Electronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 94% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 2 warning signs with Bharat Electronics (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

Bharat Electronics is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.