Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Johnson Controls-Hitachi Air Conditioning India is:

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

0.016 = ₹121m ÷ (₹12b - ₹4.5b) (Based on the trailing twelve months to December 2020).

Thus, Johnson Controls-Hitachi Air Conditioning India has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Johnson Controls-Hitachi Air Conditioning India's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Johnson Controls-Hitachi Air Conditioning India's ROCE Trending?

On the surface, the trend of ROCE at Johnson Controls-Hitachi Air Conditioning India doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 23% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Johnson Controls-Hitachi Air Conditioning India has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Johnson Controls-Hitachi Air Conditioning India's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Johnson Controls-Hitachi Air Conditioning India have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 66% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Johnson Controls-Hitachi Air Conditioning India, we've discovered 1 warning sign that you should be aware of.

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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