What Do The Returns On Capital At Atul Auto (NSE:ATULAUTO) Tell Us?

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. So while Atul Auto (NSE:ATULAUTO) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Atul Auto:

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

0.27 = ₹789m ÷ (₹4.0b - ₹1.0b) (Based on the trailing twelve months to December 2019).

So, Atul Auto has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

See our latest analysis for Atul Auto

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Atul Auto has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Atul Auto's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 45%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Atul Auto is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 62% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Atul Auto has the makings of a multi-bagger.

If you'd like to know about the risks facing Atul Auto, we've discovered 3 warning signs that you should be aware of.

Atul Auto is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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