Investors Could Be Concerned With Federal-Mogul Goetze (India)'s (NSE:FMGOETZE) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Federal-Mogul Goetze (India) (NSE:FMGOETZE) 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)

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 Federal-Mogul Goetze (India), this is the formula:

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

0.13 = ₹1.2b ÷ (₹13b - ₹3.5b) (Based on the trailing twelve months to December 2022).

So, Federal-Mogul Goetze (India) has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 14%.

Check out our latest analysis for Federal-Mogul Goetze (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Federal-Mogul Goetze (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Federal-Mogul Goetze (India)'s ROCE Trending?

In terms of Federal-Mogul Goetze (India)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Federal-Mogul Goetze (India) is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 29% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Federal-Mogul Goetze (India) that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.