Slowing Rates Of Return At Hi-Green Carbon (NSE:HIGREEN) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Hi-Green Carbon's (NSE:HIGREEN) trend of ROCE, we liked what we saw.

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Understanding Return On Capital Employed (ROCE)

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 Hi-Green Carbon, this is the formula:

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

0.13 = ₹136m ÷ (₹1.3b - ₹192m) (Based on the trailing twelve months to September 2024).

Therefore, Hi-Green Carbon has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

Check out our latest analysis for Hi-Green Carbon

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 Hi-Green Carbon has performed in the past in other metrics, you can view this free graph of Hi-Green Carbon's past earnings, revenue and cash flow .

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. Over the past three years, ROCE has remained relatively flat at around 13% and the business has deployed 368% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Hi-Green Carbon has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Hi-Green Carbon has done well to reduce current liabilities to 15% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Hi-Green Carbon's ROCE

In the end, Hi-Green Carbon has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 32% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Hi-Green Carbon does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.