Here's What's Concerning About Hathway Cable and Datacom's (NSE:HATHWAY) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 briefly looking over the numbers, we don't think Hathway Cable and Datacom (NSE:HATHWAY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hathway Cable and Datacom is:

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

0.0052 = ₹221m ÷ (₹50b - ₹7.1b) (Based on the trailing twelve months to September 2023).

Therefore, Hathway Cable and Datacom has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.5%.

See our latest analysis for Hathway Cable and Datacom

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're interested in investigating Hathway Cable and Datacom's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hathway Cable and Datacom's ROCE Trend?

In terms of Hathway Cable and Datacom's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 0.8% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Hathway Cable and Datacom has done well to pay down its current liabilities to 14% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Hathway Cable and Datacom's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last five years. Therefore based on the analysis done in this article, we don't think Hathway Cable and Datacom has the makings of a multi-bagger.

Hathway Cable and Datacom does have some risks though, and we've spotted 2 warning signs for Hathway Cable and Datacom that you might be interested in.

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. 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.