Capital Allocation Trends At Honda India Power Products (NSE:HONDAPOWER) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Honda India Power Products (NSE:HONDAPOWER) and its ROCE trend, we weren't exactly thrilled.

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

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 Honda India Power Products:

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

0.097 = ₹788m ÷ (₹9.9b - ₹1.8b) (Based on the trailing twelve months to March 2024).

So, Honda India Power Products has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 17%.

Check out our latest analysis for Honda India Power Products

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 , check out these free graphs detailing revenue and cash flow performance of Honda India Power Products.

So How Is Honda India Power Products' ROCE Trending?

When we looked at the ROCE trend at Honda India Power Products, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.7% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Honda India Power Products because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 395% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Honda India Power Products, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Honda India Power Products 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.

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