Some Investors May Be Worried About Triveni Engineering & Industries' (NSE:TRIVENI) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Triveni Engineering & Industries (NSE:TRIVENI), it didn't seem to tick all of these boxes.

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 Triveni Engineering & Industries is:

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

0.12 = ₹4.4b ÷ (₹48b - ₹11b) (Based on the trailing twelve months to December 2022).

Thus, Triveni Engineering & Industries has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

View our latest analysis for Triveni Engineering & Industries

Above you can see how the current ROCE for Triveni Engineering & Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Triveni Engineering & Industries.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Triveni Engineering & Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 44% over the last five years. 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.

On a side note, Triveni Engineering & Industries has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Triveni Engineering & Industries is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 310% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Triveni Engineering & Industries, we've spotted 4 warning signs, and 1 of them is potentially serious.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.