Apollo Tyres (NSE:APOLLOTYRE) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Apollo Tyres (NSE:APOLLOTYRE), it didn't seem to tick all of these boxes.

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. To calculate this metric for Apollo Tyres, this is the formula:

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

0.074 = ₹14b ÷ (₹258b - ₹75b) (Based on the trailing twelve months to September 2022).

Thus, Apollo Tyres has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

See our latest analysis for Apollo Tyres

Above you can see how the current ROCE for Apollo Tyres compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Apollo Tyres here for free.

What Does the ROCE Trend For Apollo Tyres Tell Us?

There are better returns on capital out there than what we're seeing at Apollo Tyres. The company has employed 41% more capital in the last five years, and the returns on that capital have remained stable at 7.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Apollo Tyres' ROCE

In summary, Apollo Tyres has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Apollo Tyres, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Apollo Tyres 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.