The Returns At Rane Brake Lining (NSE:RBL) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Rane Brake Lining (NSE:RBL) and its ROCE trend, we weren't exactly thrilled.

What is 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 Rane Brake Lining, this is the formula:

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

0.057 = ₹132m ÷ (₹3.6b - ₹1.3b) (Based on the trailing twelve months to June 2020).

Thus, Rane Brake Lining has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

Check out our latest analysis for Rane Brake Lining

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

What Can We Tell From Rane Brake Lining's ROCE Trend?

In terms of Rane Brake Lining's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Rane Brake Lining's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Rane Brake Lining have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 104% over the last five years, so investors appear very optimistic. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Rane Brake Lining does come with some risks, and we've found 4 warning signs that you should be aware of.

While Rane Brake Lining 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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