Investors Will Want Hindustan Aeronautics' (NSE:HAL) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, Hindustan Aeronautics (NSE:HAL) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hindustan Aeronautics, this is the formula:

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

0.14 = ₹51b ÷ (₹719b - ₹343b) (Based on the trailing twelve months to December 2023).

So, Hindustan Aeronautics has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Aerospace & Defense industry.

See our latest analysis for Hindustan Aeronautics

Above you can see how the current ROCE for Hindustan Aeronautics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hindustan Aeronautics for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Hindustan Aeronautics. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 70%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Hindustan Aeronautics' current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Hindustan Aeronautics' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hindustan Aeronautics has. Since the stock has returned a staggering 1,263% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Hindustan Aeronautics does have some risks though, and we've spotted 1 warning sign for Hindustan Aeronautics that you might be interested in.

While Hindustan Aeronautics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.