Here's What To Make Of Bajaj Consumer Care's (NSE:BAJAJCON) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Looking at Bajaj Consumer Care (NSE:BAJAJCON), it does have a high ROCE right now, but lets see how returns are trending.

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

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. The formula for this calculation on Bajaj Consumer Care is:

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

0.26 = ₹1.9b ÷ (₹8.8b - ₹1.5b) (Based on the trailing twelve months to September 2020).

So, Bajaj Consumer Care has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.

View 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, you can check out the forecasts from the analysts covering Bajaj Consumer Care here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Bajaj Consumer Care, we didn't gain much confidence. Historically returns on capital were even higher at 52%, but they have dropped over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Bajaj Consumer Care's ROCE

In summary, we're somewhat concerned by Bajaj Consumer Care's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 36% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Bajaj Consumer Care, you might be interested to know about the 1 warning sign that our analysis has discovered.

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