Be Wary Of Divgi TorqTransfer Systems (NSE:DIVGIITTS) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Divgi TorqTransfer Systems (NSE:DIVGIITTS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Divgi TorqTransfer Systems, this is the formula:

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

0.049 = ₹286m ÷ (₹6.4b - ₹547m) (Based on the trailing twelve months to June 2024).

So, Divgi TorqTransfer Systems has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 15%.

Check out our latest analysis for Divgi TorqTransfer Systems

In the above chart we have measured Divgi TorqTransfer Systems' 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 Divgi TorqTransfer Systems .

So How Is Divgi TorqTransfer Systems' ROCE Trending?

When we looked at the ROCE trend at Divgi TorqTransfer Systems, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 18% five years ago. However it looks like Divgi TorqTransfer Systems 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 Key Takeaway

To conclude, we've found that Divgi TorqTransfer Systems is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Divgi TorqTransfer Systems and understanding this should be part of your investment process.

While Divgi TorqTransfer Systems isn't earning the highest return, check out this free list of companies that are 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.