Here’s What’s Happening With Returns At Omax Autos (NSE:OMAXAUTO)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Omax Autos (NSE:OMAXAUTO) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Omax Autos, this is the formula:

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

0.075 = ₹321m ÷ (₹6.2b - ₹1.9b) (Based on the trailing twelve months to March 2020).

Therefore, Omax Autos has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 10%.

Check out our latest analysis for Omax Autos

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

What Does the ROCE Trend For Omax Autos Tell Us?

Omax Autos has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 202% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Omax Autos' ROCE

As discussed above, Omax Autos appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 22% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with Omax Autos (at least 3 which are concerning) , and understanding them would certainly be useful.

While Omax Autos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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