Crompton Greaves Consumer Electricals (NSE:CROMPTON) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Crompton Greaves Consumer Electricals (NSE:CROMPTON), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.33 = ₹7.4b ÷ (₹34b - ₹12b) (Based on the trailing twelve months to September 2021).

Thus, Crompton Greaves Consumer Electricals has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 12%.

View our latest analysis for Crompton Greaves Consumer Electricals

Above you can see how the current ROCE for Crompton Greaves Consumer 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 Crompton Greaves Consumer Electricals.

How Are Returns Trending?

In terms of Crompton Greaves Consumer Electricals' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 43% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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

While returns have fallen for Crompton Greaves Consumer Electricals in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 208% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 2 warning signs with Crompton Greaves Consumer Electricals and understanding these should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.