Some Investors May Be Worried About Generic Engineering Construction and Projects' (NSE:GENCON) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Generic Engineering Construction and Projects (NSE:GENCON) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Generic Engineering Construction and Projects is:

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

0.12 = ₹299m ÷ (₹3.9b - ₹1.3b) (Based on the trailing twelve months to June 2023).

So, Generic Engineering Construction and Projects has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

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're interested in investigating Generic Engineering Construction and Projects' past further, check out this free graph of past earnings, revenue and cash flow.

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

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 122%. Usually this isn't ideal, but given Generic Engineering Construction and Projects conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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

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. Although the market must be expecting these trends to improve because the stock has gained 37% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Generic Engineering Construction and Projects, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.