Eicher Motors' (NSE:EICHERMOT) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Eicher Motors (NSE:EICHERMOT), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. Analysts use this formula to calculate it for Eicher Motors:

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

0.20 = ₹35b ÷ (₹211b - ₹39b) (Based on the trailing twelve months to December 2023).

Thus, Eicher Motors has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Auto industry average of 19% it's pretty much on par.

View our latest analysis for Eicher Motors

In the above chart we have measured Eicher Motors' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Eicher Motors for free.

What Does the ROCE Trend For Eicher Motors Tell Us?

In terms of Eicher Motors' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 34%, but they have dropped over the last five years. 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.

The Bottom Line On Eicher Motors' 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 Eicher Motors. And the stock has followed suit returning a meaningful 82% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Eicher Motors could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for EICHERMOT on our platform quite valuable.

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.