The Returns On Capital At Automotive Axles (NSE:AUTOAXLES) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Automotive Axles (NSE:AUTOAXLES) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.10 = ₹596m ÷ (₹9.4b - ₹3.6b) (Based on the trailing twelve months to June 2021).

Thus, Automotive Axles has an ROCE of 10%. In isolation, that's a pretty standard return but against the Auto Components industry average of 14%, it's not as good.

See our latest analysis for Automotive Axles

Historical performance is a great place to start when researching a stock so above you can see the gauge for Automotive Axles' ROCE against it's prior returns. If you're interested in investigating Automotive Axles' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Automotive Axles' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 18% five years ago. 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.

The Bottom Line On Automotive Axles' ROCE

While returns have fallen for Automotive Axles in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 103% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Automotive Axles you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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