ABB Power Products and Systems India (NSE:POWERINDIA) Is Finding It Tricky To Allocate Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into ABB Power Products and Systems India (NSE:POWERINDIA), we weren't too upbeat about how things were going.

What is 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 ABB Power Products and Systems India, this is the formula:

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

0.18 = ₹1.7b ÷ (₹35b - ₹25b) (Based on the trailing twelve months to December 2020).

Therefore, ABB Power Products and Systems India has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 11% it's much better.

See our latest analysis for ABB Power Products and Systems India

Above you can see how the current ROCE for ABB Power Products and Systems India compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From ABB Power Products and Systems India's ROCE Trend?

We are a bit worried about the trend of returns on capital at ABB Power Products and Systems India. To be more specific, the ROCE was 41% one year ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ABB Power Products and Systems India becoming one if things continue as they have.

On a side note, ABB Power Products and Systems India's current liabilities are still rather high at 73% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that ABB Power Products and Systems India is generating lower returns from the same amount of capital. However the stock has delivered a 90% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 3 warning signs for ABB Power Products and Systems India you'll probably want to know about.

While ABB Power Products and Systems India 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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