Auto Components News

The Returns On Capital At Bharat Forge (NSE:BHARATFORG) Don’t Inspire Confidence


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. Although, when we looked at Bharat Forge (NSE:BHARATFORG), it didn’t seem to tick all of these boxes.

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

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Bharat Forge, this is the formula:

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

0.12 = ₹11b ÷ (₹164b – ₹69b) (Based on the trailing twelve months to September 2022).

Thus, Bharat Forge has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 13% generated by the Auto Components industry.

View our latest analysis for Bharat Forge

NSEI:BHARATFORG Return on Capital Employed January 23rd 2023

Above you can see how the current ROCE for Bharat Forge compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Bharat Forge.

How Are Returns Trending?

When we looked at the ROCE trend at Bharat Forge, we didn’t gain much confidence. Around five years ago the returns on capital were 18%, but since then they’ve fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Bharat Forge’s current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we’re encouraged to see that Bharat Forge is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who’ve held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Bharat Forge does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant…

While Bharat Forge 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.

Valuation is complex, but we’re helping make it simple.

Find out whether Bharat Forge is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.



Source link

Leave a Comment