HFCL (NSE:HFCL) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating HFCL (NSE:HFCL), we don't think it's current trends fit the mold of a multi-bagger.

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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 HFCL is:

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

0.041 = ₹1.9b ÷ (₹75b - ₹29b) (Based on the trailing twelve months to June 2025).

Thus, HFCL has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Telecom industry average of 14%.

See our latest analysis for HFCL

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

What Can We Tell From HFCL's ROCE Trend?

On the surface, the trend of ROCE at HFCL doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, HFCL has done well to pay down its current liabilities to 38% 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, we're somewhat concerned by HFCL's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 348% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching HFCL, you might be interested to know about the 1 warning sign that our analysis has discovered.

While HFCL 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.