Is Nelcast (NSE:NELCAST) Likely To Turn Things Around?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Nelcast (NSE:NELCAST) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nelcast:

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

0.02 = ₹119m ÷ (₹7.8b - ₹1.8b) (Based on the trailing twelve months to June 2020).

Therefore, Nelcast has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.8%.

Check out our latest analysis for Nelcast

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 want to delve into the historical earnings, revenue and cash flow of Nelcast, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Nelcast, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 2.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Nelcast's ROCE

We're a bit apprehensive about Nelcast because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Nelcast, we've spotted 3 warning signs, and 2 of them are significant.

While Nelcast 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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