Can Bharat Wire Ropes (NSE:BHARATWIRE) Continue To Grow Its Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Bharat Wire Ropes (NSE:BHARATWIRE) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Bharat Wire Ropes:

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

0.066 = ₹159m ÷ (₹7.5b - ₹5.1b) (Based on the trailing twelve months to December 2020).

So, Bharat Wire Ropes has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

View our latest analysis for Bharat Wire Ropes

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bharat Wire Ropes' ROCE against it's prior returns. If you're interested in investigating Bharat Wire Ropes' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Bharat Wire Ropes has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 146% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 68% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Bharat Wire Ropes' ROCE

To bring it all together, Bharat Wire Ropes has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 63% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Bharat Wire Ropes we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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