Automotive Axles (NSE:AUTOAXLES) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Automotive Axles (NSE:AUTOAXLES), we don't think it's current trends fit the mold of a multi-bagger.

What is 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 Automotive Axles:

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

0.051 = ₹298m ÷ (₹9.4b - ₹3.6b) (Based on the trailing twelve months to March 2021).

So, Automotive Axles has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.9%.

View our latest analysis for Automotive Axles

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 want to delve into the historical earnings, revenue and cash flow of Automotive Axles, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Automotive Axles, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.1%. However it looks like Automotive Axles might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On Automotive Axles' ROCE

Bringing it all together, while we're somewhat encouraged by Automotive Axles' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Automotive Axles does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Automotive Axles 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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