The Returns On Capital At Technocraft Industries (India) (NSE:TIIL) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Technocraft Industries (India) (NSE:TIIL), it didn't seem to tick all of these boxes.

Understanding 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 Technocraft Industries (India), this is the formula:

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

0.13 = ₹1.5b ÷ (₹17b - ₹5.3b) (Based on the trailing twelve months to December 2020).

So, Technocraft Industries (India) has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Machinery industry.

Check out our latest analysis for Technocraft Industries (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Technocraft Industries (India)'s ROCE against it's prior returns. If you'd like to look at how Technocraft Industries (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Technocraft Industries (India)'s ROCE Trending?

In terms of Technocraft Industries (India)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Technocraft Industries (India)'s ROCE

Bringing it all together, while we're somewhat encouraged by Technocraft Industries (India)'s reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 85% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for Technocraft Industries (India) you'll probably want to know about.

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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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