We Like These Underlying Return On Capital Trends At Kirloskar Electric (NSE:KECL)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Kirloskar Electric (NSE:KECL) so let's look a bit deeper.

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 Kirloskar Electric is:

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

0.12 = ₹248m ÷ (₹6.3b - ₹4.3b) (Based on the trailing twelve months to September 2024).

So, Kirloskar Electric has an ROCE of 12%. In isolation, that's a pretty standard return but against the Electrical industry average of 18%, it's not as good.

Check out our latest analysis for Kirloskar Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kirloskar Electric's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kirloskar Electric.

How Are Returns Trending?

We're delighted to see that Kirloskar Electric is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 12% which is a sight for sore eyes. In addition to that, Kirloskar Electric is employing 84% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 68%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Kirloskar Electric's ROCE

To the delight of most shareholders, Kirloskar Electric has now broken into profitability. And a remarkable 773% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 2 warning signs with Kirloskar Electric (at least 1 which is significant) , and understanding these would certainly be useful.

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.