Here's What's Concerning About Carel Industries' (BIT:CRL) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

0.19 = €69m ÷ (€519m - €163m) (Based on the trailing twelve months to March 2022).

So, Carel Industries has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Building industry.

Check out 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, you can check out the forecasts from the analysts covering Carel Industries here for free.

So How Is Carel Industries' ROCE Trending?

On the surface, the trend of ROCE at Carel Industries doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 19%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Carel Industries is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 70% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Carel Industries does have some risks though, and we've spotted 1 warning sign for Carel Industries that you might be interested in.

While Carel Industries 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.