Returns On Capital Are Showing Encouraging Signs At Spectrum Electrical Industries (NSE:SPECTRUM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Spectrum Electrical Industries' (NSE:SPECTRUM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Spectrum Electrical Industries is:

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

0.16 = ₹202m ÷ (₹2.1b - ₹796m) (Based on the trailing twelve months to September 2021).

So, Spectrum Electrical Industries has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Electrical industry.

View our latest analysis for Spectrum Electrical Industries

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

So How Is Spectrum Electrical Industries' ROCE Trending?

Investors would be pleased with what's happening at Spectrum Electrical Industries. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 791%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Spectrum Electrical Industries' ROCE

To sum it up, Spectrum Electrical Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 11% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 3 warning signs with Spectrum Electrical Industries (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Spectrum Electrical Industries 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.