Returns On Capital Signal Tricky Times Ahead For Samvardhana Motherson International (NSE:MOTHERSON)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Samvardhana Motherson International (NSE:MOTHERSON) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Samvardhana Motherson International, this is the formula:

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

0.082 = ₹25b ÷ (₹572b - ₹264b) (Based on the trailing twelve months to December 2022).

Thus, Samvardhana Motherson International has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

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.

So How Is Samvardhana Motherson International's ROCE Trending?

When we looked at the ROCE trend at Samvardhana Motherson International, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.2%. 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.

Another thing to note, Samvardhana Motherson International has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Samvardhana Motherson International. And there could be an opportunity here if other metrics look good too, because the stock has declined 14% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 2 warning signs facing Samvardhana Motherson International that you might find interesting.

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.

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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.