Crompton Greaves Consumer Electricals' (NSE:CROMPTON) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Crompton Greaves Consumer Electricals (NSE:CROMPTON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Crompton Greaves Consumer Electricals, this is the formula:

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

0.19 = ₹7.6b ÷ (₹59b - ₹19b) (Based on the trailing twelve months to September 2022).

Therefore, Crompton Greaves Consumer Electricals has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 13% it's much better.

Check out our latest analysis for Crompton Greaves Consumer Electricals

In the above chart we have measured Crompton Greaves Consumer 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 Crompton Greaves Consumer Electricals.

So How Is Crompton Greaves Consumer Electricals' ROCE Trending?

In terms of Crompton Greaves Consumer Electricals' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 38% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Crompton Greaves Consumer Electricals' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Crompton Greaves Consumer Electricals is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 32% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Crompton Greaves Consumer Electricals does have some risks though, and we've spotted 1 warning sign for Crompton Greaves Consumer Electricals that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.