Finolex Cables (NSE:FINCABLES) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Finolex Cables (NSE:FINCABLES), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Finolex Cables is:

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

0.11 = ₹5.3b ÷ (₹53b - ₹4.3b) (Based on the trailing twelve months to December 2023).

Thus, Finolex Cables has an ROCE of 11%. In isolation, that's a pretty standard return but against the Electrical industry average of 18%, it's not as good.

Check out our latest analysis for Finolex Cables

Above you can see how the current ROCE for Finolex Cables 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 analyst report for Finolex Cables .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Finolex Cables, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 11%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Finolex Cables' ROCE

In summary, Finolex Cables is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 128% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Finolex Cables could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for FINCABLES on our platform quite valuable.

While Finolex Cables 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. 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.