Capital Allocation Trends At Marine Electricals (India) (NSE:MARINE) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Marine Electricals (India) (NSE:MARINE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Marine Electricals (India) is:

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

0.099 = ₹181m ÷ (₹3.8b - ₹2.0b) (Based on the trailing twelve months to March 2021).

Therefore, Marine Electricals (India) has an ROCE of 9.9%. Even though it's in line with the industry average of 9.8%, it's still a low return by itself.

Check out our latest analysis for Marine Electricals (India)

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

So How Is Marine Electricals (India)'s ROCE Trending?

On the surface, the trend of ROCE at Marine Electricals (India) doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Marine Electricals (India)'s current liabilities are still rather high at 52% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

We're a bit apprehensive about Marine Electricals (India) 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 174%. 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 want to continue researching Marine Electricals (India), you might be interested to know about the 3 warning signs that our analysis has discovered.

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. 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.
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