Bajaj Consumer Care (NSE:BAJAJCON) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Bajaj Consumer Care (NSE:BAJAJCON), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Bajaj Consumer Care, this is the formula:

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

0.27 = ₹2.0b ÷ (₹8.8b - ₹1.5b) (Based on the trailing twelve months to December 2020).

So, Bajaj Consumer Care has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 22% earned by companies in a similar industry.

See our latest analysis for Bajaj Consumer Care

In the above chart we have measured Bajaj Consumer Care's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bajaj Consumer Care.

How Are Returns Trending?

In terms of Bajaj Consumer Care's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 54%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Bajaj Consumer Care is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Bajaj Consumer Care does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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