There Are Reasons To Feel Uneasy About Honda India Power Products' (NSE:HONDAPOWER) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Honda India Power Products (NSE:HONDAPOWER) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.057 = ₹470m ÷ (₹9.5b - ₹1.3b) (Based on the trailing twelve months to September 2024).

So, Honda India Power Products has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 16%.

See our latest analysis for Honda India Power Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for Honda India Power Products' ROCE against it's prior returns. If you'd like to look at how Honda India Power Products has performed in the past in other metrics, you can view this free graph of Honda India Power Products' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

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 5.7% from 15% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Our Take On Honda India Power Products' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Honda India Power Products have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 117%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Honda India Power Products does come with some risks, and we've found 1 warning sign that you should be aware of.

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.