There Are Reasons To Feel Uneasy About Macpower CNC Machines' (NSE:MACPOWER) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Macpower CNC Machines (NSE:MACPOWER) 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 Macpower CNC Machines, this is the formula:

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

0.17 = ₹165m ÷ (₹1.4b - ₹440m) (Based on the trailing twelve months to June 2023).

Thus, Macpower CNC Machines has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

See our latest analysis for Macpower CNC Machines

Historical performance is a great place to start when researching a stock so above you can see the gauge for Macpower CNC Machines' ROCE against it's prior returns. If you're interested in investigating Macpower CNC Machines' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Macpower CNC Machines' ROCE Trending?

In terms of Macpower CNC Machines' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 23% five years ago. However it looks like Macpower CNC Machines might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Macpower CNC Machines has decreased its current liabilities to 31% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Macpower CNC Machines' ROCE

Bringing it all together, while we're somewhat encouraged by Macpower CNC Machines' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 296% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Macpower CNC Machines does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) 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.