Hero MotoCorp (NSE:HEROMOTOCO) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Hero MotoCorp (NSE:HEROMOTOCO), it does have a high ROCE right now, but lets see 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 Hero MotoCorp:

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

0.24 = ₹46b ÷ (₹262b - ₹70b) (Based on the trailing twelve months to March 2024).

Therefore, Hero MotoCorp has an ROCE of 24%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

View our latest analysis for Hero MotoCorp

Above you can see how the current ROCE for Hero MotoCorp compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hero MotoCorp .

How Are Returns Trending?

When we looked at the ROCE trend at Hero MotoCorp, we didn't gain much confidence. Historically returns on capital were even higher at 31%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hero MotoCorp is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 132% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 1 warning sign for Hero MotoCorp 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.