Generic Engineering Construction and Projects (NSE:GENCON) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Generic Engineering Construction and Projects (NSE:GENCON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Generic Engineering Construction and Projects is:

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

0.08 = ₹212m ÷ (₹4.6b - ₹2.0b) (Based on the trailing twelve months to March 2024).

Thus, Generic Engineering Construction and Projects has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

Check out our latest analysis for Generic Engineering Construction and Projects

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Generic Engineering Construction and Projects.

The Trend Of ROCE

In terms of Generic Engineering Construction and Projects' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 16% five years ago. However it looks like Generic Engineering Construction and Projects 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Generic Engineering Construction and Projects' ROCE

Bringing it all together, while we're somewhat encouraged by Generic Engineering Construction and Projects' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Generic Engineering Construction and Projects has the makings of a multi-bagger.

If you'd like to know about the risks facing Generic Engineering Construction and Projects, we've discovered 3 warning signs that you should be aware of.

While Generic Engineering Construction and Projects isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.