Capital investment trends at Havells India (NSE:HAVELLS) look solid

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Therefore, when we looked at ROCE trends at Havell India (NSE:HAVELLS), we liked what we saw.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Havells India, here is the formula:

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

0.23 = ₹15b ÷ (₹96b – ₹32b) (Based on the last twelve months to December 2021).

So, Havells India posted a ROCE of 23%. In absolute terms, this is excellent performance and even better than the electrical industry average of 13%.

See our latest analysis for Havells India

NSEI:HAVELLS Return on Capital Employed March 30, 2022

Above you can see how Havells India’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you wish, you can view analyst forecasts covering Havells India here for free.

So, what is the ROCE trend for Havells India?

Havells India deserves credit for its returns. Over the past five years, ROCE has remained relatively stable at around 23% and the company has deployed 94% more capital into its operations. Now considering the ROCE is an attractive 23%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.

What we can learn from Havells India’s ROCE

Havells India has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted about. And long-term investors would be delighted with the 155% return they’ve received over the past five years. So while investors seem to recognize these promising trends, we still think the stock merits further research.

On a separate note, we found 1 warning sign for Havells India you will probably want to know more.

High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.