Be Wary Of Honasa Consumer (NSE:HONASA) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Honasa Consumer (NSE:HONASA), it didn't seem to tick all of these boxes.

We've discovered 1 warning sign about Honasa Consumer. View them for free.

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. The formula for this calculation on Honasa Consumer is:

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

0.025 = ₹312m ÷ (₹17b - ₹4.8b) (Based on the trailing twelve months to December 2024).

So, Honasa Consumer has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 17%.

View our latest analysis for Honasa Consumer

Above you can see how the current ROCE for Honasa Consumer 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 analyst report for Honasa Consumer .

So How Is Honasa Consumer's ROCE Trending?

On the surface, the trend of ROCE at Honasa Consumer doesn't inspire confidence. Around four years ago the returns on capital were 9.4%, but since then they've fallen to 2.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

To conclude, we've found that Honasa Consumer is reinvesting in the business, but returns have been falling. Since the stock has declined 42% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Honasa Consumer has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Honasa Consumer you'll probably want to know about.

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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.