Birla Cable's (NSE:BIRLACABLE) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Birla Cable (NSE:BIRLACABLE), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Birla Cable:

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

0.034 = ₹63m ÷ (₹2.7b - ₹869m) (Based on the trailing twelve months to December 2020).

Thus, Birla Cable has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 5.8%.

See our latest analysis for Birla Cable

Historical performance is a great place to start when researching a stock so above you can see the gauge for Birla Cable's ROCE against it's prior returns. If you'd like to look at how Birla Cable has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Birla Cable Tell Us?

On the surface, the trend of ROCE at Birla Cable doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 17% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Birla Cable has decreased its current liabilities to 32% 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.

What We Can Learn From Birla Cable's ROCE

In summary, Birla Cable is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 90% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Birla Cable, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Birla Cable 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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