Some Investors May Be Worried About Techno Electric & Engineering's (NSE:TECHNOE) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Techno Electric & Engineering (NSE:TECHNOE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Techno Electric & Engineering:

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

0.072 = ₹1.3b ÷ (₹22b - ₹4.6b) (Based on the trailing twelve months to September 2020).

Therefore, Techno Electric & Engineering has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.4% average generated by the Construction industry.

Check out our latest analysis for Techno Electric & Engineering

In the above chart we have measured Techno Electric & Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Techno Electric & Engineering here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Techno Electric & Engineering doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 11% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On Techno Electric & Engineering's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Techno Electric & Engineering have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 39% return over the last year, so investors appear very optimistic. 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'd like to know about the risks facing Techno Electric & Engineering, we've discovered 1 warning sign that you should be aware of.

While Techno Electric & Engineering 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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