Lumax Auto Technologies (NSE:LUMAXTECH) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Lumax Auto Technologies (NSE:LUMAXTECH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Lumax Auto Technologies, this is the formula:

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

0.066 = ₹375m ÷ (₹8.7b - ₹3.1b) (Based on the trailing twelve months to December 2020).

So, Lumax Auto Technologies has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.7%.

View our latest analysis for Lumax Auto Technologies

In the above chart we have measured Lumax Auto Technologies' 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 report on analyst forecasts for the company.

So How Is Lumax Auto Technologies' ROCE Trending?

On the surface, the trend of ROCE at Lumax Auto Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Lumax Auto Technologies' ROCE

We're a bit apprehensive about Lumax Auto Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 171%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Lumax Auto Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Lumax Auto Technologies 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. 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.
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