Hindware Home Innovation (NSE:HINDWAREAP) Knows How To Allocate Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Hindware Home Innovation's (NSE:HINDWAREAP) trend of ROCE, we really liked what we saw.

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 Hindware Home Innovation is:

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

0.21 = ₹1.6b ÷ (₹21b - ₹13b) (Based on the trailing twelve months to March 2022).

Thus, Hindware Home Innovation has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 7.1%.

Check out our latest analysis for Hindware Home Innovation

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 want to delve into the historical earnings, revenue and cash flow of Hindware Home Innovation, check out these free graphs here.

How Are Returns Trending?

It's hard not to be impressed by Hindware Home Innovation's returns on capital. Over the past four years, ROCE has remained relatively flat at around 21% and the business has deployed 82,619% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Hindware Home Innovation can keep this up, we'd be very optimistic about its future.

Another thing to note, Hindware Home Innovation has a high ratio of current liabilities to total assets of 63%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Hindware Home Innovation's ROCE

Hindware Home Innovation has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a separate note, we've found 2 warning signs for Hindware Home Innovation you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.