Some Investors May Be Worried About Hatsun Agro Product's (NSE:HATSUN) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hatsun Agro Product (NSE:HATSUN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hatsun Agro Product, this is the formula:

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

0.13 = ₹3.4b ÷ (₹38b - ₹12b) (Based on the trailing twelve months to March 2023).

Therefore, Hatsun Agro Product has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Food industry.

See our latest analysis for Hatsun Agro Product

Above you can see how the current ROCE for Hatsun Agro Product compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hatsun Agro Product here for free.

SWOT Analysis for Hatsun Agro Product

The Trend Of ROCE

We weren't thrilled with the trend because Hatsun Agro Product's ROCE has reduced by 38% over the last five years, while the business employed 173% more capital. That being said, Hatsun Agro Product raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hatsun Agro Product's earnings and if they change as a result from the capital raise.

On a side note, Hatsun Agro Product has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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 Hatsun Agro Product's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hatsun Agro Product is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 85% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Hatsun Agro Product (at least 1 which is concerning) , and understanding these would certainly be useful.

While Hatsun Agro Product 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.