This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Hindustan Aeronautics Limited (NSE:HAL) stock.
Hindustan Aeronautics stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Hindustan Aeronautics, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Calculating Return On Capital Employed for HAL
Choosing to invest in Hindustan Aeronautics comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Hindustan Aeronautics is good at growing investor capital. I have calculated Hindustan Aeronautics’s ROCE for you below:
ROCE Calculation for HAL
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹33.47b ÷ (₹492.16b – ₹254.06b) = 14.1%
The calculation above shows that HAL’s earnings were 14.1% of capital employed. Comparing this to a healthy 15% benchmark shows Hindustan Aeronautics is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.
Then why have investors invested?
Although Hindustan Aeronautics is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of HAL’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that HAL boosted investor return on capital employed from 6.8%. Similarly, the movement in the earnings variable shows a jump from ₹18.49b to ₹33.47b whilst the amount of capital employed has declined because of a decline in total assets , which is an indication that Hindustan Aeronautics has increased the ROCE for investors by producing more earnings and using less capital.
Although Hindustan Aeronautics’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for HAL’s future growth? Take a look at our free research report of analyst consensus for HAL’s outlook.
- Valuation: What is HAL worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether HAL is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.