Here's What's Concerning About Triveni Turbine's (NSE:TRITURBINE) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Triveni Turbine (NSE:TRITURBINE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Triveni Turbine:

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

0.20 = ₹1.3b ÷ (₹9.4b - ₹2.9b) (Based on the trailing twelve months to March 2021).

Therefore, Triveni Turbine has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Electrical industry.

Check out our latest analysis for Triveni Turbine

Above you can see how the current ROCE for Triveni Turbine compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Triveni Turbine.

The Trend Of ROCE

In terms of Triveni Turbine's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 45%, but since then they've fallen to 20%. 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.

On a side note, Triveni Turbine has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Triveni Turbine's ROCE

In summary, we're somewhat concerned by Triveni Turbine's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Triveni Turbine does have some risks though, and we've spotted 2 warning signs for Triveni Turbine that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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