Returns On Capital Signal Tricky Times Ahead For Electronics Mart India (NSE:EMIL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Electronics Mart India (NSE:EMIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Electronics Mart India is:

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

0.14 = ₹3.4b ÷ (₹31b - ₹5.9b) (Based on the trailing twelve months to September 2024).

So, Electronics Mart India has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Specialty Retail industry.

See our latest analysis for Electronics Mart India

In the above chart we have measured Electronics Mart India's 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 Electronics Mart India for free.

What Can We Tell From Electronics Mart India's ROCE Trend?

In terms of Electronics Mart India's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Electronics Mart India has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Electronics Mart India is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 20% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Electronics Mart India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for EMIL on our platform quite valuable.

While Electronics Mart India 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.