Returns Are Gaining Momentum At Isgec Heavy Engineering (NSE:ISGEC)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Isgec Heavy Engineering's (NSE:ISGEC) returns on capital, so let's have a look.

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. The formula for this calculation on Isgec Heavy Engineering is:

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

0.13 = ₹4.5b ÷ (₹74b - ₹40b) (Based on the trailing twelve months to December 2023).

Thus, Isgec Heavy Engineering has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Machinery industry average it falls behind.

See our latest analysis for Isgec Heavy Engineering

Above you can see how the current ROCE for Isgec Heavy Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Isgec Heavy Engineering .

What Can We Tell From Isgec Heavy Engineering's ROCE Trend?

We like the trends that we're seeing from Isgec Heavy Engineering. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 79%. So we're very much inspired by what we're seeing at Isgec Heavy Engineering thanks to its ability to profitably reinvest capital.

On a side note, Isgec Heavy Engineering's current liabilities are still rather high at 55% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Isgec Heavy Engineering has. Since the stock has returned a staggering 103% to shareholders over the last year, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Isgec Heavy Engineering and understanding this should be part of your investment process.

While Isgec Heavy Engineering may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.