Eimco Elecon (India) (NSE:EIMCOELECO) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Eimco Elecon (India) (NSE:EIMCOELECO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Eimco Elecon (India), this is the formula:

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

0.011 = ₹36m ÷ (₹3.7b - ₹311m) (Based on the trailing twelve months to March 2021).

Thus, Eimco Elecon (India) has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

See our latest analysis for Eimco Elecon (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Eimco Elecon (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Eimco Elecon (India)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.1% from 6.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Eimco Elecon (India) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.4% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Eimco Elecon (India) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Eimco Elecon (India) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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