There Are Reasons To Feel Uneasy About Olectra Greentech's (NSE:OLECTRA) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Olectra Greentech (NSE:OLECTRA), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Olectra Greentech:

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

0.0091 = ₹69m ÷ (₹9.3b - ₹1.8b) (Based on the trailing twelve months to March 2021).

Therefore, Olectra Greentech has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 11%.

Check out our latest analysis for Olectra Greentech

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

So How Is Olectra Greentech's ROCE Trending?

When we looked at the ROCE trend at Olectra Greentech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 10% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Olectra Greentech's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Olectra Greentech is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 1,079% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Olectra Greentech that we think you should be aware of.

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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