This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on BEML Limited (NSE:BEML) stock.
Purchasing BEML gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to BEML’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand BEML’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at BEML’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated BEML’s ROCE for you below:
ROCE Calculation for BEML
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹1.6b ÷ (₹47b – ₹17b) = 6.3%
BEML’s 6.3% ROCE means that for every ₹100 you invest, the company creates ₹6.3. Comparing this to a healthy 15% benchmark shows BEML is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.
A deeper look
The underperforming ROCE is not ideal for BEML investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, BEML’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that BEML’s ROCE has risen from 1.9%, indicating the company’s capital returns have stengthened. With this, the current earnings of ₹1.6b improved from ₹58m and capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
ROCE for BEML investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate BEML or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for BEML’s future growth? Take a look at our free research report of analyst consensus for BEML’s outlook.
- Valuation: What is BEML worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether BEML is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.