Returns At Modison (NSE:MODISONLTD) Appear To Be Weighed Down

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Modison's (NSE:MODISONLTD) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Modison, this is the formula:

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

0.13 = ₹277m ÷ (₹2.7b - ₹624m) (Based on the trailing twelve months to June 2024).

Therefore, Modison has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Electrical industry average it falls behind.

See our latest analysis for Modison

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

So How Is Modison's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 44% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Modison has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Modison's ROCE

The main thing to remember is that Modison has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 137% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Modison does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

While Modison isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.