Here's What To Make Of Hindalco Industries' (NSE:HINDALCO) Decelerating Rates Of Return

July 01, 2023

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Hindalco Industries (NSE:HINDALCO), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hindalco Industries:

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

0.096 = ₹158b ÷ (₹2.2t - ₹605b) (Based on the trailing twelve months to March 2023).

Thus, Hindalco Industries has an ROCE of 9.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

See our latest analysis for Hindalco Industries

In the above chart we have measured Hindalco Industries' 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 Hindalco Industries here for free.

SWOT Analysis for Hindalco Industries

Strength

Debt is well covered by earnings and cashflows.

Dividends are covered by earnings and cash flows.

Dividend information for HINDALCO.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Good value based on P/E ratio compared to estimated Fair P/E ratio.

Threat

Annual earnings are forecast to grow slower than the Indian market.

What else are analysts forecasting for HINDALCO?

What Can We Tell From Hindalco Industries' ROCE Trend?

There are better returns on capital out there than what we're seeing at Hindalco Industries. The company has consistently earned 9.6% for the last five years, and the capital employed within the business has risen 43% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Hindalco Industries has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 97% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Hindalco Industries does have some risks though, and we've spotted 3 warning signs for Hindalco Industries that you might be interested in.

While Hindalco 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.

Valuation is complex, but we're here to simplify it.

Discover if Hindalco Industries might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.