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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Whirlpool of India (NSE:WHIRLPOOL), it didn’t seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Whirlpool of India is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.073 = ₹2.9b ÷ (₹54b – ₹14b) (Based on the trailing twelve months to September 2022).
Thus, Whirlpool of India has an ROCE of 7.3%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 13%.
Check out our latest analysis for Whirlpool of India
In the above chart we have measured Whirlpool of India’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Whirlpool of India, we didn’t gain much confidence. Around five years ago the returns on capital were 25%, but since then they’ve fallen to 7.3%. 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, Whirlpool of India has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Whirlpool of India’s ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Whirlpool of India. These trends don’t appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to continue researching Whirlpool of India, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Whirlpool of India 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 Whirlpool of India 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.
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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.
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