Be Wary Of HPL Electric & Power (NSE:HPL) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into HPL Electric & Power (NSE:HPL), the trends above didn't look too great.

What is 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 HPL Electric & Power:

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

0.092 = ₹760m ÷ (₹16b - ₹7.6b) (Based on the trailing twelve months to December 2021).

Thus, HPL Electric & Power has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 13%.

View our latest analysis for HPL Electric & Power

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

The Trend Of ROCE

There is reason to be cautious about HPL Electric & Power, given the returns are trending downwards. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on HPL Electric & Power becoming one if things continue as they have.

Another thing to note, HPL Electric & Power has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On HPL Electric & Power's ROCE

In summary, it's unfortunate that HPL Electric & Power is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

HPL Electric & Power does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.