Investors Could Be Concerned With Generic Engineering Construction and Projects' (NSE:GENCON) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Generic Engineering Construction and Projects (NSE:GENCON), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Generic Engineering Construction and Projects:

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).

So, 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 16%.

View our latest analysis for Generic Engineering Construction and Projects

Historical performance is a great place to start when researching a stock so above you can see the gauge for Generic Engineering Construction and Projects' ROCE against it's prior returns. 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. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.0%. 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. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

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. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. 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.

One more thing to note, we've identified 3 warning signs with Generic Engineering Construction and Projects and understanding these should be part of your investment process.

While Generic Engineering Construction and Projects 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.