Investors Could Be Concerned With Hi-Tech Pipes' (NSE:HITECH) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hi-Tech Pipes (NSE:HITECH), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Hi-Tech Pipes:

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

0.20 = ₹579m ÷ (₹5.8b - ₹2.8b) (Based on the trailing twelve months to December 2020).

Therefore, Hi-Tech Pipes has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.6% it's much better.

See our latest analysis for Hi-Tech Pipes

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hi-Tech Pipes' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hi-Tech Pipes, check out these free graphs here.

What Can We Tell From Hi-Tech Pipes' ROCE Trend?

On the surface, the trend of ROCE at Hi-Tech Pipes doesn't inspire confidence. Over the last five years, returns on capital have decreased to 20% from 27% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Hi-Tech Pipes has decreased its current liabilities to 49% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Hi-Tech Pipes' ROCE

To conclude, we've found that Hi-Tech Pipes is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.0% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Hi-Tech Pipes we've found 4 warning signs (1 is potentially serious!) 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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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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