Honeywell Automation India (NSE:HONAUT) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Honeywell Automation India (NSE:HONAUT) 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)

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 Honeywell Automation India is:

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

0.18 = ₹6.0b ÷ (₹45b - ₹12b) (Based on the trailing twelve months to March 2023).

Thus, Honeywell Automation India has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 12% it's much better.

Check out our latest analysis for Honeywell Automation India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Honeywell Automation India's ROCE against it's prior returns. If you'd like to look at how Honeywell Automation India 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 Honeywell Automation India Tell Us?

When we looked at the ROCE trend at Honeywell Automation India, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 18%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Honeywell Automation India has done well to pay down its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Honeywell Automation India is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 114% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

While Honeywell Automation India doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Honeywell Automation India 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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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.