Our Take On The Returns On Capital At Onward Technologies (NSE:ONWARDTEC)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Onward Technologies (NSE:ONWARDTEC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Onward Technologies is:

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

0.047 = ₹46m ÷ (₹1.4b - ₹439m) (Based on the trailing twelve months to December 2020).

So, Onward Technologies has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for Onward Technologies

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

What Can We Tell From Onward Technologies' ROCE Trend?

When we looked at the ROCE trend at Onward Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 4.7%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a related note, Onward Technologies has decreased its current liabilities to 31% 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.

The Bottom Line On Onward Technologies' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Onward Technologies have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 66% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Onward Technologies, you might be interested to know about the 5 warning signs that our analysis has discovered.

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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