Investors Could Be Concerned With Samvardhana Motherson International's (NSE:MOTHERSON) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Samvardhana Motherson International (NSE:MOTHERSON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Samvardhana Motherson International:

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

0.049 = ₹17b ÷ (₹563b - ₹223b) (Based on the trailing twelve months to June 2022).

Therefore, Samvardhana Motherson International has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

View our latest analysis for Samvardhana Motherson International

In the above chart we have measured Samvardhana Motherson International's 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 Samvardhana Motherson International here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Samvardhana Motherson International doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.9% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Samvardhana Motherson International's ROCE

In summary, Samvardhana Motherson International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Samvardhana Motherson International we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.

While Samvardhana Motherson International 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.