ABB Power Products and Systems India (NSE: POWERINDIA) could risk contracting as a business


When looking for a stock to invest, what can tell us that the business is in decline? A potentially declining business often exhibits two trends, one to recover on capital employed (ROCE) down, and a based capital employed which is also declining. This reveals that the company is not increasing the wealth of its shareholders because returns decline and its net asset base shrinks. And from the first reading, things don’t look very good ABB Power Products and Systems India (NSE: POWERINDIA), let’s see why.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on ABB Power Products and Systems India is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.18 = ₹ 1.8b ÷ (₹ 32b – ₹ 22b) (Based on the last twelve months up to September 2021).

Thereby, ABB Power Products and Systems India has a ROCE of 18%. On its own, this is standard efficiency, but it is much better than the 10% generated by the electrical industry.

Check out our latest review for ABB Power Products and Systems India

NSEI: POWERINDIA Return on capital employed on November 8, 2021

In the chart above, we measured ABB Power Products and Systems India’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

So, how is the ROCE of ABB Power Products and Systems India evolving?

We are a little worried about the return on capital trend at ABB Power Products and Systems India. To be more precise, the ROCE was 33% a year ago, but since then it has dropped noticeably. In addition to this, it should be noted that the amount of capital employed within the company has remained relatively stable. This combination may be indicative of a mature company that still has areas to deploy capital, but the returns received are not as high potentially due to new competition or lower margins. So, because these trends are generally not conducive to the creation of a multi-bagger, we will not hold our breath on ABB Power Products and Systems India becoming one if things continue as they have.

On a separate but related note, it is important to know that ABB Power Products and Systems India has a current liabilities to total assets ratio of 69%, which we consider to be quite high. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.

The bottom line

Overall, lower returns for the same amount of capital employed are not exactly the sign of a dialing machine. Given that the stock has climbed 147% in the past year, it seems investors have high expectations for the stock. Regardless, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.

If you are interested in further researching ABB Power Products and Systems India, you may be interested in knowing the 1 warning sign that our analysis found.

Although ABB Power Products and Systems India is not currently achieving the highest returns, we have compiled a list of companies that are currently generating over 25% return on equity. Check it out free list here.

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

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