Bajaj Auto (NSE:BAJAJ-AUTO) Might Become A Compounding Machine

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Bajaj Auto's (NSE:BAJAJ-AUTO) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Bajaj Auto:

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

0.27 = ₹82b ÷ (₹365b - ₹66b) (Based on the trailing twelve months to September 2023).

Therefore, Bajaj Auto has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Auto industry average of 15%.

View our latest analysis for Bajaj Auto

Above you can see how the current ROCE for Bajaj Auto 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 Bajaj Auto.

How Are Returns Trending?

We'd be pretty happy with returns on capital like Bajaj Auto. Over the past five years, ROCE has remained relatively flat at around 27% 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 these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Bajaj Auto's ROCE

In short, we'd argue Bajaj Auto has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 141% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Bajaj Auto, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.