Some Investors May Be Worried About 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

Return On Capital Employed (ROCE): What Is It?

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)

0.15 = ₹311m ÷ (₹3.2b - ₹1.1b) (Based on the trailing twelve months to December 2022).

Therefore, Generic Engineering Construction and Projects has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Construction industry.

View 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'd like to look at how Generic Engineering Construction and Projects has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Generic Engineering Construction and Projects' ROCE Trending?

We weren't thrilled with the trend because Generic Engineering Construction and Projects' ROCE has reduced by 45% over the last five years, while the business employed 299% more capital. That being said, Generic Engineering Construction and Projects raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Generic Engineering Construction and Projects might not have received a full period of earnings contribution from it.

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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Generic Engineering Construction and Projects. And the stock has followed suit returning a meaningful 97% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Generic Engineering Construction and Projects, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.