Eimco Elecon (India)'s (NSE:EIMCOELECO) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Eimco Elecon (India)'s (NSE:EIMCOELECO) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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)

0.059 = ₹212m ÷ (₹3.9b - ₹326m) (Based on the trailing twelve months to June 2023).

Thus, Eimco Elecon (India) has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 17%.

Check out 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're interested in investigating Eimco Elecon (India)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Eimco Elecon (India) Tell Us?

Eimco Elecon (India) is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 31% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Eimco Elecon (India)'s ROCE

In summary, we're delighted to see that Eimco Elecon (India) has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 244% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Eimco Elecon (India) (of which 1 shouldn't be ignored!) that you should know about.

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.

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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.