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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Crompton Greaves Consumer Electricals (NSE:CROMPTON), it didn't seem to tick all of these boxes.

Understanding 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 Crompton Greaves Consumer Electricals:

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

0.17 = ₹6.5b ÷ (₹57b - ₹17b) (Based on the trailing twelve months to March 2023).

Therefore, Crompton Greaves Consumer Electricals has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Durables industry.

View 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, you can check out the forecasts from the analysts covering Crompton Greaves Consumer Electricals here for free.

What Can We Tell From Crompton Greaves Consumer Electricals' ROCE Trend?

In terms of Crompton Greaves Consumer Electricals' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 36% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Crompton Greaves Consumer Electricals. In light of this, the stock has only gained 24% 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 2 warning signs for Crompton Greaves Consumer Electricals that you might be interested in.

While Crompton Greaves Consumer 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.