Our Take On The Returns On Capital At Hercules Hoists (NSE:HERCULES)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Hercules Hoists (NSE:HERCULES), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Hercules Hoists is:

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

0.00029 = ₹1.2m ÷ (₹4.1b - ₹175m) (Based on the trailing twelve months to December 2020).

Thus, Hercules Hoists has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for Hercules Hoists

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hercules Hoists' ROCE against it's prior returns. If you're interested in investigating Hercules Hoists' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hercules Hoists Tell Us?

On the surface, the trend of ROCE at Hercules Hoists doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.03% from 3.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Hercules Hoists' diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Hercules Hoists, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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