Heranba Industries (NSE:HERANBA) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Heranba Industries (NSE:HERANBA) and its ROCE trend, we weren't exactly thrilled.

We've discovered 2 warning signs about Heranba Industries. View them for free.

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. The formula for this calculation on Heranba Industries is:

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

0.085 = ₹817m ÷ (₹18b - ₹7.9b) (Based on the trailing twelve months to December 2024).

So, Heranba Industries has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Heranba Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Heranba Industries has performed in the past in other metrics, you can view this free graph of Heranba Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Heranba Industries, we didn't gain much confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 8.5%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Heranba Industries has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Heranba Industries' ROCE

To conclude, we've found that Heranba Industries is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last three years. Therefore based on the analysis done in this article, we don't think Heranba Industries has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Heranba Industries (1 makes us a bit uncomfortable) you should be aware of.

While Heranba Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.