The Returns On Capital At Inox Green Energy Services (NSE:INOXGREEN) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Inox Green Energy Services (NSE:INOXGREEN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Inox Green Energy Services, this is the formula:

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

0.013 = ₹219m ÷ (₹21b - ₹4.2b) (Based on the trailing twelve months to March 2024).

So, Inox Green Energy Services has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.

See our latest analysis for Inox Green Energy Services

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

So How Is Inox Green Energy Services' ROCE Trending?

When we looked at the ROCE trend at Inox Green Energy Services, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 1.8% 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.

On a side note, Inox Green Energy Services has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

We're a bit apprehensive about Inox Green Energy Services because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 149%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in Inox Green Energy Services it's worth checking out our FREE intrinsic value approximation for INOXGREEN to see if it's trading at an attractive price in other respects.

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. 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.