Investors Could Be Concerned With Finolex Cables' (NSE:FINCABLES) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Finolex Cables (NSE:FINCABLES), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Finolex Cables:

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

0.087 = ₹4.9b ÷ (₹61b - ₹5.2b) (Based on the trailing twelve months to December 2024).

So, Finolex Cables has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 18%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out 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. Over the last five years, returns on capital have decreased to 8.7% from 14% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

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 345% 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 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.