Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Johnson Controls-Hitachi Air Conditioning India:

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

0.039 = ₹267m ÷ (₹17b - ₹9.7b) (Based on the trailing twelve months to June 2024).

Thus, Johnson Controls-Hitachi Air Conditioning India has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 12%.

Check out our latest analysis for Johnson Controls-Hitachi Air Conditioning India

In the above chart we have measured Johnson Controls-Hitachi Air Conditioning India's 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 analyst report for Johnson Controls-Hitachi Air Conditioning India .

How Are Returns Trending?

In terms of Johnson Controls-Hitachi Air Conditioning India's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 23%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Johnson Controls-Hitachi Air Conditioning India to turn into a multi-bagger.

Another thing to note, Johnson Controls-Hitachi Air Conditioning India has a high ratio of current liabilities to total assets of 58%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 35% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Johnson Controls-Hitachi Air Conditioning India that you might find interesting.

While Johnson Controls-Hitachi Air Conditioning India 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.