Some Investors May Be Worried About Apollo Tyres' (NSE:APOLLOTYRE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Apollo Tyres (NSE:APOLLOTYRE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. The formula for this calculation on Apollo Tyres is:

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

0.073 = ₹14b ÷ (₹262b - ₹72b) (Based on the trailing twelve months to December 2021).

Therefore, Apollo Tyres has an ROCE of 7.3%. In absolute terms, that's a low return and it also 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 to see what analysts are forecasting going forward, you should check out our free report for Apollo Tyres.

What Does the ROCE Trend For Apollo Tyres Tell Us?

In terms of Apollo Tyres' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 7.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Apollo Tyres' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Apollo Tyres is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with Apollo Tyres (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.