Returns On Capital Signal Difficult Times Ahead For Bajaj Hindusthan Sugar (NSE:BAJAJHIND)

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Bajaj Hindusthan Sugar (NSE:BAJAJHIND), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on Bajaj Hindusthan Sugar is:

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

0.0037 = ₹347m ÷ (₹159b - ₹65b) (Based on the trailing twelve months to June 2024).

Therefore, Bajaj Hindusthan Sugar has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

Check out our latest analysis for Bajaj Hindusthan Sugar

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Bajaj Hindusthan Sugar. Unfortunately the returns on capital have diminished from the 3.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Bajaj Hindusthan Sugar to turn into a multi-bagger.

Another thing to note, Bajaj Hindusthan Sugar has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Bajaj Hindusthan Sugar is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 417%. 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 want to continue researching Bajaj Hindusthan Sugar, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Bajaj Hindusthan Sugar 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.