Some Investors May Be Worried 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. 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 briefly looking over the numbers, we don't think Carel Industries (BIT:CRL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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)

0.18 = €54m ÷ (€427m - €123m) (Based on the trailing twelve months to March 2021).

So, Carel Industries has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Building industry.

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 report for Carel Industries.

How Are Returns Trending?

On the surface, the trend of ROCE at Carel Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 25% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Carel Industries' ROCE

Bringing it all together, while we're somewhat encouraged by Carel Industries' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 37% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Carel Industries, we've discovered 2 warning signs that you should be aware of.

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. 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.
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