Whirlpool of India (NSE:WHIRLPOOL) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Whirlpool of India (NSE:WHIRLPOOL), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Whirlpool of India:

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

0.096 = ₹3.6b ÷ (₹53b - ₹15b) (Based on the trailing twelve months to September 2021).

Therefore, Whirlpool of India has an ROCE of 9.6%. 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 Whirlpool of India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Whirlpool of India's ROCE against it's prior returns. If you're interested in investigating Whirlpool of India's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Whirlpool of India, we didn't gain much confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 9.6%. 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.

What We Can Learn From Whirlpool of India's ROCE

While returns have fallen for Whirlpool of India in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 89% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 2 warning signs for Whirlpool of India (1 is significant) you should be aware of.

While Whirlpool of India 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.