Returns On Capital Signal Tricky Times Ahead For Eicher Motors (NSE:EICHERMOT)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Eicher Motors (NSE:EICHERMOT), it didn't seem to tick all of these boxes.

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 Eicher Motors, this is the formula:

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

0.16 = ₹21b ÷ (₹162b - ₹30b) (Based on the trailing twelve months to June 2022).

Thus, Eicher Motors has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto industry average of 19%.

See our latest analysis for Eicher Motors

Above you can see how the current ROCE for Eicher Motors compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Eicher Motors here for free.

What Can We Tell From Eicher Motors' ROCE Trend?

When we looked at the ROCE trend at Eicher Motors, we didn't gain much confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 16%. 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 Eicher Motors' ROCE

While returns have fallen for Eicher Motors in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 12% 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.

If you're still interested in Eicher Motors it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Eicher Motors may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.