Capital Allocation Trends At Bajaj Electricals (NSE:BAJAJELEC) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Bajaj Electricals (NSE:BAJAJELEC), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Bajaj Electricals:

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

0.12 = ₹2.0b ÷ (₹44b - ₹26b) (Based on the trailing twelve months to December 2021).

So, Bajaj Electricals has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Consumer Durables industry.

See our latest analysis for Bajaj Electricals

Above you can see how the current ROCE for Bajaj Electricals 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 Bajaj Electricals.

How Are Returns Trending?

When we looked at the ROCE trend at Bajaj Electricals, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 23% five years ago. However it looks like Bajaj Electricals might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Bajaj Electricals has a high ratio of current liabilities to total assets of 60%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Bajaj Electricals' ROCE

Bringing it all together, while we're somewhat encouraged by Bajaj Electricals' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 188% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Bajaj Electricals that you might find interesting.

While Bajaj Electricals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.