Capital Allocation Trends At Havells India (NSE:HAVELLS) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Havells India (NSE:HAVELLS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Havells India:

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

0.19 = ₹11b ÷ (₹83b - ₹28b) (Based on the trailing twelve months to December 2020).

Therefore, Havells India has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Electrical industry.

Check out our latest analysis for Havells India

Above you can see how the current ROCE for Havells India compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Havells India's ROCE Trend?

When we looked at the ROCE trend at Havells India, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 19%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Havells India is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 204% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Havells India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Havells India 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. 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.
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