Some Investors May Be Worried About Bajaj Electricals' (NSE:BAJAJELEC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Bajaj Electricals (NSE:BAJAJELEC), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.15 = ₹2.9b ÷ (₹43b - ₹24b) (Based on the trailing twelve months to September 2022).

Thus, Bajaj Electricals has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Durables industry.

Our analysis indicates that BAJAJELEC is potentially overvalued!

In the above chart we have measured Bajaj Electricals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bajaj Electricals.

What The Trend Of ROCE Can Tell Us

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 15% from 24% 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.

On a side note, Bajaj Electricals has done well to pay down its current liabilities to 56% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Bajaj Electricals' ROCE

In summary, Bajaj Electricals is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 161% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Bajaj Electricals, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Bajaj Electricals 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.