Carel Industries' (BIT:CRL) 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Carel Industries (BIT:CRL), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Carel Industries:

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

0.10 = €67m ÷ (€842m - €172m) (Based on the trailing twelve months to September 2024).

Therefore, Carel Industries has an ROCE of 10.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 10.0%.

See our latest analysis for Carel Industries

In the above chart we have measured Carel Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Carel Industries .

What Does the ROCE Trend For Carel Industries Tell Us?

We weren't thrilled with the trend because Carel Industries' ROCE has reduced by 50% over the last five years, while the business employed 161% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Carel Industries might not have received a full period of earnings contribution from it.

The Key Takeaway

To conclude, we've found that Carel Industries is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 136% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Carel Industries could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for CRL on our platform quite valuable.

While Carel Industries 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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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.