What Do The Returns On Capital At Eimco Elecon (India) (NSE:EIMCOELECO) Tell Us?

What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Eimco Elecon (India) (NSE:EIMCOELECO) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Eimco Elecon (India):

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

0.0086 = ₹29m ÷ (₹3.6b - ₹223m) (Based on the trailing twelve months to December 2020).

Thus, Eimco Elecon (India) has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for Eimco Elecon (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eimco Elecon (India)'s ROCE against it's prior returns. 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.

So How Is Eimco Elecon (India)'s ROCE Trending?

In terms of Eimco Elecon (India)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 0.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Eimco Elecon (India)'s ROCE

We're a bit apprehensive about Eimco Elecon (India) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 22% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Eimco Elecon (India), we've spotted 4 warning signs, and 1 of them is significant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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