Returns On Capital Signal Tricky Times Ahead For Happiest Minds Technologies (NSE:HAPPSTMNDS)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Happiest Minds Technologies (NSE:HAPPSTMNDS), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Happiest Minds Technologies:

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

0.15 = ₹2.7b ÷ (₹33b - ₹15b) (Based on the trailing twelve months to December 2024).

Thus, Happiest Minds Technologies has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.

See our latest analysis for Happiest Minds Technologies

In the above chart we have measured Happiest Minds Technologies' 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 Happiest Minds Technologies for free.

How Are Returns Trending?

In terms of Happiest Minds Technologies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 31%, but since then they've fallen to 15%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Happiest Minds Technologies has decreased its current liabilities to 44% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Happiest Minds Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Happiest Minds Technologies is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 41% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Happiest Minds Technologies does have some risks though, and we've spotted 1 warning sign for Happiest Minds Technologies 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.