What are the first trends to look for to identify a title that could multiply over the long term? Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly reviewing the numbers, we don’t think Eicher Engines (NSE: EICHERMOT) has the makings of a multi-bagger in the future, but let’s see why this may be the case.
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 Eicher Motors is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.13 = 16b ÷ (₹ 144b – ₹ 23b) (Based on the last twelve months up to September 2021).
Thereby, Eicher Motors has a ROCE of 13%. This is a relatively normal return on capital, and it is around the 14% generated by the automotive industry.
Check out our latest review for Eicher Motors
In the graph above, we measured Eicher Motors’ 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.
What the ROCE trend can tell us
When we looked at the ROCE trend at Eicher Motors, we didn’t gain much confidence. About five years ago, returns on capital were 45%, but since then they have fallen to 13%. Although, as both income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.
The bottom line
In summary, despite lower returns in the short term, we are encouraged to see that Eicher Motors is reinvesting for growth and therefore has higher sales. These trends are starting to be recognized by investors as the stock has provided a 19% gain to shareholders who have held it over the past five years. Therefore, we recommend that you dig deeper into this title to confirm if it is a good investment.
While Eicher Motors isn’t too shining in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE estimate of intrinsic value on our platform.
Although Eicher Motors does not achieve the highest efficiency, check out this free list of companies that generate high returns on equity with strong balance sheets.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.