Pulz Electronics Limited (NSE:PULZ): Why Return On Capital Employed Is Important

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Pulz Electronics Limited (NSEI:PULZ) stock.

Purchasing Pulz Electronics gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to PULZ’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Pulz Electronics is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Calculating Return On Capital Employed for PULZ

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Pulz Electronics is good at growing investor capital. I have calculated Pulz Electronics’s ROCE for you below:

As you can see, PULZ earned ₹6 from every ₹100 you invested over the previous twelve months. This shows Pulz Electronics provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if PULZ is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.

A deeper look

PULZ doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that PULZ weakened investor return on capital employed from 7.77%. Over the same period, EBT went from ₹2.79M to ₹2.75M and capital employed has increased due to a hike in the level of total assets employed , which means the company's ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

ROCE for PULZ investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

1. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for Pulz Electronics's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.