Here's What To Make Of Mazda's (NSE:MAZDA) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Mazda's (NSE:MAZDA) trend of ROCE, we liked what we saw.

Understanding 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. To calculate this metric for Mazda, this is the formula:

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

0.15 = ₹204m ÷ (₹1.7b - ₹324m) (Based on the trailing twelve months to June 2020).

Thus, Mazda has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.5% it's much better.

View our latest analysis for Mazda

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mazda's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mazda, check out these free graphs here.

What Can We Tell From Mazda's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 44% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Mazda has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, Mazda has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Mazda, we've discovered 4 warning signs that you should be aware of.

While Mazda 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.

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This article by Simply Wall St is general in nature. 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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