Bajaj Auto (NSE:BAJAJ-AUTO) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at Bajaj Auto (NSE:BAJAJ-AUTO), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is 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. To calculate this metric for Bajaj Auto, this is the formula:

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

0.25 = ₹68b ÷ (₹335b - ₹58b) (Based on the trailing twelve months to September 2021).

Therefore, Bajaj Auto has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Auto industry average of 14%.

Check out 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 report on analyst forecasts for the company.

What Can We Tell From Bajaj Auto's ROCE Trend?

When we looked at the ROCE trend at Bajaj Auto, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 31%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Bajaj Auto's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bajaj Auto. These trends are starting to be recognized by investors since the stock has delivered a 39% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.