Bajaj Auto (NSE:BAJAJ-AUTO) Looks To Prolong Its Impressive Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Bajaj Auto's (NSE:BAJAJ-AUTO) ROCE trend, we were very happy with what we saw.

Understanding 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 Bajaj Auto is:

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

0.30 = ₹89b ÷ (₹365b - ₹66b) (Based on the trailing twelve months to December 2023).

So, Bajaj Auto has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Auto industry average of 19%.

View our latest analysis for Bajaj Auto

In the above chart we have measured Bajaj Auto's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Bajaj Auto .

What The Trend Of ROCE Can Tell Us

Bajaj Auto deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 30% and the business has deployed 44% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Bajaj Auto can keep this up, we'd be very optimistic about its future.

Our Take On Bajaj Auto's ROCE

In summary, we're delighted to see that Bajaj Auto has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 234% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Bajaj Auto, we've discovered 1 warning sign that you should be aware of.

Bajaj 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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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.