Finolex Cables (NSE:FINCABLES) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Finolex Cables (NSE:FINCABLES) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Finolex Cables is:

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

0.099 = ₹5.2b ÷ (₹56b - ₹3.4b) (Based on the trailing twelve months to June 2024).

Therefore, Finolex Cables has an ROCE of 9.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 18%.

See our latest analysis for Finolex Cables

In the above chart we have measured Finolex Cables' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Finolex Cables .

What Does the ROCE Trend For Finolex Cables Tell Us?

When we looked at the ROCE trend at Finolex Cables, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Finolex Cables might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Finolex Cables is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 315% 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.

While Finolex Cables doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for FINCABLES on our platform.

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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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.