Techno Electric & Engineering (NSE:TECHNOE) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

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. To calculate this metric for Techno Electric & Engineering, this is the formula:

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

0.059 = ₹2.3b ÷ (₹45b - ₹7.1b) (Based on the trailing twelve months to September 2024).

Thus, Techno Electric & Engineering has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

Check out our latest analysis for Techno Electric & Engineering

Above you can see how the current ROCE for Techno Electric & Engineering 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 analyst report for Techno Electric & Engineering .

What Does the ROCE Trend For Techno Electric & Engineering Tell Us?

We weren't thrilled with the trend because Techno Electric & Engineering's ROCE has reduced by 54% over the last five years, while the business employed 135% more capital. That being said, Techno Electric & Engineering raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Techno Electric & Engineering's earnings and if they change as a result from the capital raise.

What We Can Learn From Techno Electric & Engineering's ROCE

While returns have fallen for Techno Electric & Engineering in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 301% 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.

Techno Electric & Engineering does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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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.