Is Centum Electronics (NSE:CENTUM) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Centum Electronics (NSE:CENTUM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Centum Electronics is:

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

0.17 = ₹679m ÷ (₹11b - ₹7.1b) (Based on the trailing twelve months to September 2020).

So, Centum Electronics has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.8% it's much better.

Check out our latest analysis for Centum Electronics

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'd like to look at how Centum Electronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Centum Electronics' ROCE Trending?

When we looked at the ROCE trend at Centum Electronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, Centum Electronics' current liabilities have increased over the last five years to 64% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 17%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Centum Electronics' ROCE

In summary, we're somewhat concerned by Centum Electronics' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Centum Electronics, we've spotted 6 warning signs, and 1 of them is a bit concerning.

While Centum Electronics 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.

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