Investors Could Be Concerned With Honeywell Automation India's (NSE:HONAUT) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Honeywell Automation India:

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

0.13 = ₹4.1b ÷ (₹41b - ₹11b) (Based on the trailing twelve months to September 2022).

Thus, Honeywell Automation India has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Electronic industry.

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 want to delve into the historical earnings, revenue and cash flow of Honeywell Automation India, check out these free graphs here.

What Does the ROCE Trend For Honeywell Automation India Tell Us?

On the surface, the trend of ROCE at Honeywell Automation India doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Honeywell Automation India has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line

To conclude, we've found that Honeywell Automation India is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 140% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Honeywell Automation India it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.