When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Hindusthan National Glass & Industries (NSE:HINDNATGLS), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for Hindusthan National Glass & Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = ₹114m ÷ (₹31b - ₹23b) (Based on the trailing twelve months to September 2020).
Therefore, Hindusthan National Glass & Industries has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hindusthan National Glass & Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hindusthan National Glass & Industries, check out these free graphs here.
What Does the ROCE Trend For Hindusthan National Glass & Industries Tell Us?
In terms of Hindusthan National Glass & Industries' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 1.9% five years ago but has since fallen to 1.4%. On top of that, the business is utilizing 69% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.On a side note, Hindusthan National Glass & Industries' current liabilities have increased over the last five years to 74% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
What We Can Learn From Hindusthan National Glass & Industries' ROCE
In summary, it's unfortunate that Hindusthan National Glass & Industries is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Hindusthan National Glass & Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
While Hindusthan National Glass & Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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