Here's What's Concerning About Crompton Greaves Consumer Electricals' (NSE:CROMPTON) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Crompton Greaves Consumer Electricals (NSE:CROMPTON) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.16 = ₹6.5b ÷ (₹57b - ₹18b) (Based on the trailing twelve months to September 2024).

So, Crompton Greaves Consumer Electricals has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Durables industry.

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

So How Is Crompton Greaves Consumer Electricals' ROCE Trending?

When we looked at the ROCE trend at Crompton Greaves Consumer Electricals, we didn't gain much confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 16%. 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.

On a side note, Crompton Greaves Consumer Electricals has done well to pay down its current liabilities to 31% 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.

The Bottom Line

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. In light of this, the stock has only gained 35% 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.

One more thing to note, we've identified 1 warning sign with Crompton Greaves Consumer Electricals and understanding this should be part of your investment process.

While Crompton Greaves Consumer 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.